UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
—————————————————
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35108
—————————————————
SERVICESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in our charter) |
| | |
Delaware | | 81-0578975 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
717 17th Street, 5th Floor Denver, Colorado | | 80202 |
(Address of principal executive offices) | | (Zip Code) |
|
| |
Delaware | No. 81-0578975 |
(State or Other Jurisdiction of
Incorporation or Organization)
| (I.R.S. Employer
Identification No.)
|
| |
717 17th St., 5th Floor
Denver, CO
| 80202(720) 889-8500 |
(Address of Principal Executive Offices) | (Zip Code)Registrant’s telephone number, including area code) |
(720) 889-8500
(Registrant’s Telephone Number, Including Area Code)
—————————————————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer | ¨o | Accelerated filer | x |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) o | Smaller reporting company | ¨o |
|
| Emerging growth company | ¨
o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨x No xo
Indicate number of shares outstanding of eachSecurities registered pursuant to Section 12(b) of the issuer’s classes of common stock, as of the latest practical date:
|
| |
Class | Outstanding as of October 31, 2017 |
Common Stock, $0.0001 Par Value | 90,154,059SREV | The Nasdaq Stock Market LLC |
(Title of each class) | (Trading Symbol) | (Name of each exchange on which registered) |
As of April 30, 2019, 93,307,941 shares of common stock of ServiceSource International, Inc. were outstanding.
SERVICESOURCE INTERNATIONAL, INC.
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION
|
| |
Item 1. | Financial Statements |
SERVICESOURCE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| | ServiceSource International, Inc. | | ServiceSource International, Inc. |
Consolidated Balance Sheet | | Consolidated Balance Sheet |
(in thousands, except per share amounts) | | (in thousands, except per share amounts) |
(unaudited) | | (unaudited) |
| September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 39,585 |
| | $ | 47,692 |
| $ | 24,807 |
| | $ | 26,535 |
|
Short-term investments | 140,188 |
| | 137,881 |
| |
Accounts receivable, net | 53,061 |
| | 63,289 |
| 50,935 |
| | 54,284 |
|
Prepaid expenses and other | 7,326 |
| | 7,607 |
| 7,079 |
| | 5,653 |
|
Total current assets | 240,160 |
| | 256,469 |
| 82,821 |
| | 86,472 |
|
| | | | |
Property and equipment, net | 35,703 |
| | 38,180 |
| 35,744 |
| | 36,593 |
|
Deferred income taxes, net of current portion | 69 |
| | 64 |
| |
Goodwill and intangibles, net | 6,797 |
| | 7,932 |
| |
Other assets, net | 3,556 |
| | 3,445 |
| |
Contract acquisition costs | | 2,371 |
| | 2,660 |
|
Right-of-use assets | | 36,944 |
| | — |
|
Goodwill | | 6,334 |
| | 6,334 |
|
Other assets | | 4,823 |
| | 4,521 |
|
Total assets | $ | 286,285 |
| | $ | 306,090 |
| $ | 169,037 |
| | $ | 136,580 |
|
| | | | |
Liabilities and Stockholders’ Equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 1,129 |
| | $ | 1,916 |
| $ | 2,129 |
| | $ | 2,424 |
|
Accrued taxes | 387 |
| | 1,388 |
| |
Accrued expenses | | 2,429 |
| | 3,380 |
|
Accrued compensation and benefits | 17,470 |
| | 21,579 |
| 17,657 |
| | 15,509 |
|
Convertible notes, net | 141,726 |
| | — |
| |
Deferred revenue | 1,713 |
| | 4,152 |
| |
Accrued expenses | 6,127 |
| | 5,891 |
| |
Operating lease liabilities | | 8,504 |
| | — |
|
Other current liabilities | 1,241 |
| | 2,958 |
| 5,993 |
| | 6,894 |
|
Total current liabilities | 169,793 |
| | 37,884 |
| 36,712 |
| | 28,207 |
|
Convertible notes, net | — |
| | 134,775 |
| |
| | | | |
Operating lease liabilities, net of current portion | | 30,918 |
| | — |
|
Other long-term liabilities | 7,127 |
| | 6,495 |
| 3,512 |
| | 6,540 |
|
Total liabilities | 176,920 |
| | 179,154 |
| 71,142 |
| | 34,747 |
|
Commitments and contingencies (Note 5) |
| |
| |
| | | | |
Commitments and contingencies (Note 7) | |
| |
|
| | | | |
Stockholders’ equity: |
| |
| | | |
Common stock; $0.0001 par value; 1,000,000 shares authorized; 90,266 shares issued and 90,145 shares outstanding as of September 30, 2017; 88,304 shares issued and 88,183 shares outstanding as of December 31, 2016 | 8 |
| | 8 |
| |
Preferred stock, $0.001 par value; 20,000 shares authorized and none issued and outstanding | | — |
| | — |
|
Common stock; $0.0001 par value; 1,000,000 shares authorized; 93,263 shares issued and 93,142 shares outstanding as of March 31, 2019; 92,895 shares issued and 92,774 shares outstanding as of December 31, 2018 | | 9 |
|
| 9 |
|
Treasury stock | (441 | ) | | (441 | ) | (441 | ) | | (441 | ) |
Additional paid-in capital | 355,969 |
| | 344,521 |
| 370,951 |
| | 369,246 |
|
Accumulated deficit | (246,281 | ) | | (216,361 | ) | (273,102 | ) | | (267,383 | ) |
Accumulated other comprehensive income | 110 |
| | (791 | ) | 478 |
| | 402 |
|
Total stockholders’ equity | 109,365 |
| | 126,936 |
| 97,895 |
| | 101,833 |
|
Total liabilities and stockholders’ equity | $ | 286,285 |
| | $ | 306,090 |
| $ | 169,037 |
| | $ | 136,580 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
SERVICESOURCE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| | ServiceSource International, Inc. | | ServiceSource International, Inc. |
Consolidated Statement of Operations | | Consolidated Statement of Operations |
(in thousands, except per share amounts) | | (in thousands, except per share amounts) |
(unaudited) | | (unaudited) |
| Three Months Ended September 30, | | Nine Months Ended September 30, | For the Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
Net revenue | $ | 58,132 |
| | $ | 62,514 |
| | $ | 173,103 |
| | $ | 184,233 |
| $ | 55,511 |
| | $ | 58,585 |
|
Cost of revenue | 40,803 |
| | 40,789 |
| | 121,729 |
| | 122,568 |
| 39,476 |
| | 41,724 |
|
Gross profit | 17,329 |
| | 21,725 |
| | 51,374 |
| | 61,665 |
| 16,035 |
| | 16,861 |
|
Operating expenses: | | | | | | | | | |
|
Sales and marketing | 7,829 |
| | 8,847 |
| | 24,790 |
| | 30,626 |
| 7,949 |
| | 9,238 |
|
Research and development | 1,048 |
| | 1,952 |
| | 4,534 |
| | 6,132 |
| 1,263 |
| | 1,516 |
|
General and administrative | 12,543 |
| | 14,638 |
| | 40,029 |
| | 38,233 |
| 10,982 |
| | 12,889 |
|
Restructuring and other | 545 |
| | — |
| | 6,259 |
| | — |
| |
Restructuring and other related costs | | 1,058 |
| | 53 |
|
Total operating expenses | 21,965 |
| | 25,437 |
| | 75,612 |
| | 74,991 |
| 21,252 |
| | 23,696 |
|
Loss from operations | (4,636 | ) | | (3,712 | ) | | (24,238 | ) | | (13,326 | ) | (5,217 | ) | | (6,835 | ) |
Interest expense and other, net | (2,839 | ) | | (2,291 | ) | | (7,555 | ) | | (5,499 | ) | |
Gain (loss) on cost basis equity investment | 2,100 |
| | (2,300 | ) | | 2,100 |
| | (2,300 | ) | |
Interest and other expense, net | | (490 | ) | | (2,846 | ) |
Impairment loss on investment securities | | — |
| | (1,958 | ) |
Loss before income taxes | (5,375 | ) | | (8,303 | ) | | (29,693 | ) | | (21,125 | ) | (5,707 | ) | | (11,639 | ) |
Income tax (benefit) provision | (180 | ) | | 968 |
| | 227 |
| | 2,505 |
| |
Provision for income tax expense | | (12 | ) | | (13 | ) |
Net loss | $ | (5,195 | ) | | $ | (9,271 | ) | | $ | (29,920 | ) | | $ | (23,630 | ) | $ | (5,719 | ) | | $ | (11,652 | ) |
Net loss per share, basic and diluted | $ | (0.06 | ) | | $ | (0.11 | ) | | $ | (0.34 | ) | | $ | (0.27 | ) | |
Weighted average common shares outstanding, basic and diluted | 89,511 |
| | 86,283 |
| | 88,907 |
| | 85,981 |
| |
Net loss per common share | | | | |
Basic and diluted | | $ | (0.06 | ) | | $ | (0.13 | ) |
Weighted-average common shares outstanding: | | | | |
Basic and diluted | | 92,914 |
| | 90,358 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
SERVICESOURCE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net loss | $ | (5,195 | ) | | $ | (9,271 | ) | | $ | (29,920 | ) | | $ | (23,630 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustments | 285 |
| | (110 | ) | | 783 |
| | (1,229 | ) |
Unrealized gain (loss) on short-term investments | 13 |
| | (81 | ) | | 118 |
| | 849 |
|
Other comprehensive income (loss), net of tax | 298 |
| | (191 | ) | | 901 |
| | (380 | ) |
Total comprehensive loss, net of tax | $ | (4,897 | ) | | $ | (9,462 | ) | | $ | (29,019 | ) | | $ | (24,010 | ) |
|
| | | | | | | |
ServiceSource International, Inc. |
Consolidated Statements of Comprehensive Loss |
(in thousands) |
(unaudited) |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Net loss | $ | (5,719 | ) | | $ | (11,652 | ) |
Other comprehensive income |
| |
|
Available for sale securities: | | | |
Unrealized loss on short-term investments | — |
| | (705 | ) |
Reclassification adjustment for impairment loss included in net loss | — |
| | 1,958 |
|
Net change in available for sale debt securities | — |
| | 1,253 |
|
Foreign currency translation adjustments | 76 |
| | 274 |
|
Other comprehensive income | 76 |
| | 1,527 |
|
Comprehensive loss | $ | (5,643 | ) | | $ | (10,125 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
SERVICESOURCE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Cash flows from operating activities | | | |
Net loss | $ | (29,920 | ) | | $ | (23,630 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization | 17,167 |
| | 11,636 |
|
Amortization of debt discount and issuance costs | 6,951 |
| | 6,464 |
|
Amortization of premium on short-term investments | (172 | ) | | 888 |
|
Deferred income taxes | 177 |
| | 1,698 |
|
Stock-based compensation | 10,396 |
| | 7,441 |
|
Restructuring and other | 2,522 |
| | — |
|
(Gain) loss on cost basis equity investment | (2,100 | ) | | 2,300 |
|
Changes in operating assets and liabilities: | | | |
Accounts receivable, net | 12,307 |
| | 2,778 |
|
Deferred revenue | (2,440 | ) | | (805 | ) |
Prepaid expenses and other | 387 |
| | 1,306 |
|
Accounts payable | (813 | ) | | 407 |
|
Accrued taxes | (1,019 | ) | | (627 | ) |
Accrued compensation and benefits | (4,713 | ) | | (1,509 | ) |
Accrued expenses | (839 | ) | | 1,670 |
|
Other liabilities | (1,375 | ) | | (311 | ) |
Net cash provided by operating activities | 6,516 |
| | 9,706 |
|
Cash flows from investing activities | | | |
Acquisition of property and equipment | (13,843 | ) | | (21,203 | ) |
Proceeds from sale of cost basis equity investment | 2,100 |
| | — |
|
Purchases of short-term investments | (56,589 | ) | | (86,365 | ) |
Sales of short-term investments | 51,119 |
| | 83,331 |
|
Maturities of short-term investments | 3,506 |
| | 350 |
|
Net cash used in investing activities | (13,707 | ) | | (23,887 | ) |
Cash flows from financing activities | | | |
Repayment on capital lease obligations | (52 | ) | | (120 | ) |
Repurchase of common stock | — |
| | (8,921 | ) |
Proceeds from common stock issuances | 1,062 |
| | 5,034 |
|
Minimum tax withholding requirement | (735 | ) | | (770 | ) |
Net cash provided by (used in) financing activities | 275 |
| | (4,777 | ) |
Net decrease in cash and cash equivalents | (6,916 | ) | | (18,958 | ) |
Effect of exchange rate changes on cash and cash equivalents | (1,191 | ) | | (1,681 | ) |
Cash and cash equivalents at beginning of period | 47,692 |
| | 72,334 |
|
Cash and cash equivalents at end of period | $ | 39,585 |
| | $ | 51,695 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ServiceSource International, Inc. |
Consolidated Statements of Stockholders' Equity |
(in thousands) |
(unaudited) |
| | | | | | | | | | | |
| Common Stock | | Treasury Shares/Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total |
| Shares | | Amount | | Shares | | Amount | |
Balance at January 1, 2019 | 92,895 |
| | $ | 9 |
| | (121 | ) | | $ | (441 | ) | | $ | 369,246 |
| | $ | (267,383 | ) | | $ | 402 |
| | $ | 101,833 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (5,719 | ) | | — |
| | (5,719 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 76 |
| | 76 |
|
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 1,564 |
| | — |
| | — |
| | 1,564 |
|
Issuance of common stock, restricted stock units | 229 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Proceeds from the exercise of stock options and employee stock purchase plan | 139 |
| | — |
| | — |
| | — |
| | 141 |
| | — |
| | — |
| | 141 |
|
Balance at March 31, 2019 | 93,263 |
| | $ | 9 |
| | (121 | ) | | $ | (441 | ) | | $ | 370,951 |
| | $ | (273,102 | ) | | $ | 478 |
| | $ | 97,895 |
|
| | | | | | | | | | | | | | | |
| Common Stock | | Treasury Shares/Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Shares | | Amount | | Shares | | Amount | |
Balance at December 31, 2017 | 90,380 |
| | $ | 8 |
| | (121 | ) | | $ | (441 | ) | | $ | 359,347 |
| | $ | (246,207 | ) | | $ | (598 | ) | | $ | 112,109 |
|
Cumulative effect of ASC 606 - initial adoption | — |
| | — |
| | — |
| | — |
| | — |
| | 3,709 |
| | — |
| | 3,709 |
|
Adjusted balance at January 1, 2018 | 90,380 |
| | $ | 8 |
| | (121 | ) | | $ | (441 | ) | | $ | 359,347 |
| | $ | (242,498 | ) | | $ | (598 | ) | | $ | 115,818 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (11,652 | ) | | — |
| | (11,652 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,527 |
| | 1,527 |
|
Stock-based compensation | — |
| | — |
| | — |
| | — |
| | 3,223 |
| | — |
| | — |
| | 3,223 |
|
Issuance of common stock, restricted stock units | 84 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Proceeds from the exercise of stock options and employee stock purchase plan | 119 |
| | — |
| | — |
| | — |
| | 353 |
| | — |
| | — |
| | 353 |
|
Net cash paid for payroll taxes on restricted stock unit releases | — |
| | — |
| | — |
| | — |
| | (53 | ) | | — |
| | — |
| | (53 | ) |
Balance at March 31, 2018 | 90,583 |
| | $ | 8 |
| | (121 | ) | | $ | (441 | ) | | $ | 362,870 |
| | $ | (254,150 | ) | | $ | 929 |
| | $ | 109,216 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
SERVICESOURCE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| | | | | | | |
ServiceSource International, Inc. |
Consolidated Statements of Cash Flows |
(in thousands) |
(unaudited) |
| |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net loss | $ | (5,719 | ) | | $ | (11,652 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities | | | |
Depreciation and amortization | 3,285 |
| | 4,803 |
|
Amortization of debt discount and issuance costs | 18 |
| | 2,421 |
|
Amortization of contract acquisition costs | 400 |
| | 426 |
|
Amortization of premium on short-term investments | — |
| | 115 |
|
Amortization of right-of-use assets | 2,239 |
| | — |
|
Stock-based compensation | 1,570 |
| | 3,111 |
|
Restructuring and other related costs | 1,041 |
| | 196 |
|
Impairment loss on investment securities | — |
| | 1,958 |
|
Other | — |
| | 80 |
|
Net changes in operating assets and liabilities |
|
| |
|
|
Accounts receivable, net | 3,258 |
| | 6,923 |
|
Prepaid expenses and other assets | (1,277 | ) | | (1,523 | ) |
Contract acquisition costs | (108 | ) | | (430 | ) |
Accounts payable | (18 | ) | | (2,809 | ) |
Accrued compensation and benefits | 1,094 |
| | (2,654 | ) |
Operating lease liabilities | (2,338 | ) | | — |
|
Accrued expenses | (1,023 | ) | | (367 | ) |
Other liabilities | (338 | ) | | 1 |
|
Net cash provided by operating activities | 2,084 |
| | 599 |
|
Cash flows from investing activities: | | | |
Acquisition of property and equipment | (2,898 | ) | | (3,469 | ) |
Purchases of short-term investments | — |
| | 7 |
|
Sales of short-term investments | — |
| | 2,064 |
|
Maturities of short-term investments | — |
| | 825 |
|
Net cash used in investing activities | (2,898 | ) | | (573 | ) |
Cash flows from financing activities: | | | |
Repayment on finance lease obligations | (190 | ) | | (43 | ) |
Proceeds from issuance of common stock | 141 |
| | 353 |
|
Payments related to minimum tax withholdings on restricted stock unit releases | — |
| | (53 | ) |
Net cash (used in) provided by financing activities | (49 | ) | | 257 |
|
Effect of exchange rate changes on cash and cash equivalents and restricted cash | 185 |
| | 78 |
|
Net change in cash and cash equivalents and restricted cash | (678 | ) | | 361 |
|
Cash and cash equivalents and restricted cash, beginning of period | 27,779 |
| | 52,633 |
|
Cash and cash equivalents and restricted cash, end of period | $ | 27,101 |
| | $ | 52,994 |
|
Supplemental disclosures of cash flow information: | | | |
Cash paid for interest | $ | 66 |
| | $ | 1,146 |
|
Supplemental disclosures of non-cash activities: | | | |
Acquisition of property and equipment accrued in accounts payable and accrued expenses | $ | 208 |
| | $ | 196 |
|
Increase in contract acquisition costs and benefit to accumulated deficit related to adoption of ASC 606 | $ | — |
| | $ | 3,346 |
|
Increase in prepaid expenses and other, other liabilities and benefit to accumulated deficit related to adoption of ASC 606 | $ | — |
| | $ | 363 |
|
Increase in operating lease liabilities related to the adoption of ASC 842 | $ | 41,760 |
| | $ | — |
|
Increase in right-of-use assets related to the adoption of ASC 842 | $ | 39,183 |
| | $ | — |
|
Decrease in prepaids and other assets related to the adoption of ASC 842 | $ | (749 | ) | | $ | — |
|
Decrease in other liabilities related to the adoption of ASC 842 | $ | (3,308 | ) | | $ | — |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
ServiceSource International, Inc.
Notes to Consolidated Financial Statements
(unaudited)
Note 1 — Description of Business and Basis of PresentationThe Company
ServiceSource International, Inc. (together with its subsidiaries, the “Company”) is a global leader in outsourced, performance-based customer success and revenue growth solutions. Through the Company’sour people, processes and technology, the Company finds, converts, growswe grow and retainsretain revenue on behalf of its clients—our clients — some of the world’s leading business-to-business companies—companies — in more than 3545 languages. The Company’sOur solutions help itsour clients strengthen their customer relationships, drive improved customer adoption, expansion and retention and minimize churn. The Company’sOur technology platform and best-practice business processes combined with itsour highly-trained, client-focused revenue delivery professionals and data from over 1520 years of operating experience enable the Companyus to provide itsour clients greater value for itsour customer success services than attained by its clients’our clients' in-house customer success teams.
“ServiceSource,” “the Company,” “we,” “us,” or “our”, as used herein, refer to ServiceSource International, Inc. and its wholly-owned subsidiaries, unless the context indicates otherwise.
The Company’s pay-for-performance model allows its clients to pay for the services through either flat-rate or variable commissions based on the revenue generated by the Company on their behalf. Fixed-fee arrangements are typically used in quick deployments to address discrete target areas of our clients’ needs. The Company also earns revenue through its professional services teams, who assist clients with data optimization, as well as through supporting select existing clients with the Company’s Renew OnDemand application.optimization. The Company’s corporate headquarters is located in Denver, Colorado. The Company has additional U.S. offices in California and Tennessee, and international offices in Bulgaria, Ireland, Japan, Malaysia, Philippines, Singapore and the United Kingdom.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim unaudited interim condensed consolidated financial statements (“condensed consolidated financial statements”) include the accounts of ServiceSource International, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
These condensed consolidated financial statementsConsolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X without audit.for interim financial information. Accordingly, theythese financial statements do not include all of the information required by U.S. GAAP for annual financial statements. The unaudited condensed consolidated balance sheetConsolidated Balance Sheet as of December 31, 20162018 has been derived from the Company’s audited annual consolidated financial statementsConsolidated Financial Statements included in our Annual Reportannual report on Form 10-K for the year ended December 31, 20162018 filed with the Securities and Exchange Commission (“SEC”) on March 6, 2017. These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto for the year ended December 31, 2016, included in our Annual Report on Form 10-K.
February 28, 2019. In the opinion of management, these condensed consolidated financial statementsConsolidated Financial Statements reflect all adjustments, including normal recurring adjustments, management considers necessary for a fair statementpresentation of the Company’s financial position, operating results, and cash flows for the interim periods presented. PreparationThese Consolidated Financial Statements and accompanying notes should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2018, included in our annual report on Form 10-K. Interim results are not necessarily indicative of financial statementsresults for the entire year.
Principles of Consolidation
The accompanying unaudited interim Consolidated Financial Statements include the accounts of ServiceSource International, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported inamount of net revenue and expenses during the reporting period.
The Company’s condensed consolidated financial statementssignificant accounting judgments and accompanying notes.estimates include, but are not limited to: revenue recognition, the valuation and recognition of stock-based compensation, the recognition and measurement of current and deferred income tax assets and liabilities and uncertain tax positions, the provision for bad debts and impairment of goodwill and long-lived assets.
The Company bases its estimates and judgments on historical experience and on various assumptions that it believes are reasonable under the circumstances. However, future events are subject to change and estimates and judgments routinely require adjustment. Actual results couldand outcomes may differ materially from thoseour estimates. Also,
Reclassifications
Certain items on the resultsConsolidated Statement of Cash Flows for the interim periods arethree months ended March 31, 2018 have been reclassified to conform to the current year presentation. These reclassifications did not necessarily indicativeaffect the Company's Consolidated Balance Sheet as of resultsDecember 31, 2018 or the Company's Consolidated Statements of Operations, Consolidated Statements of Comprehensive Loss or Consolidated Statements of Stockholders' Equity for the entire year.three months ended March 31, 2018.
RecentNew Accounting PronouncementsStandards Adopted
Leases
In May 2014,February 2016, the Financial Accounting Standard Board (“FASB”("FASB") issued an Accounting StandardsStandard Update No. 2014-09, “Revenue("ASU") 2016-02, Leases (Topic 842), which requires the recognition of assets and liabilities arising from Contracts with Customers (Topic 606)” (“ASU 2014-09”) which amendedlease transactions on the existing FASB Accounting Standards Codification. Underbalance sheet and will also require significant additional disclosures about the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The standard also specifies that the incremental costs of obtaining a contract with a customer and the costs of fulfilling a contract with a customer (if those costs are not within the scope of another Topic or Sub-Topic) would be deferred and recognized over the appropriate period of contract performance if they are expected to be recovered. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method, also known as the cumulative catch-up transition method). ASU 2014-09 is effective for the Company for interim and annual periods beginning after December 15, 2017.
The Company continues to assess the impact of the standard, and has not yet determined whether the standard will have a material impact on our consolidated financial statements. However, we currently believe the most significant impact is from the timing of recognition of certain sales commission expenses, which upon adoptionleases. Substantially all leases, including current operating leases, will be recognized as costs over a period of time instead of immediately. We are also in the process of assessing the impact of the new standardby lessees on certain of our contracts that include performance-based fees. We currently recognize such fees in the period when the performance criteria have been met; however, under the new standard we would estimate the variable fees and recognize amounts as control of the promised deliverable is transferred to the client for which it is probable that a significant reversal would not occur. For certain contracts, this could result in accelerated recognition of the performance-based fees. We do not currently expect our recurring revenue management fees, based on a fixed percentage of overall sales value associated with the service contracts, to be significantly impacted by the new standard.
We will adopt the standard in the first quarter of 2018 using the modified prospective method. We expect to complete our assessment process, including impacts on our processes, systems and financial statement disclosures, by the end of the fourth quarter of 2017.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). This standard requires entities that lease assets to recognize on thetheir balance sheet as a lease asset for its right to use the assetsunderlying asset and liabilitiesa lease liability for the rights and obligations created by those leases.corresponding lease obligation. The standard is effective for fiscal years and thebeginning after December 15, 2018, including interim periods within those fiscal yearsyears. ASU 2016-02 initially required entities to adopt the standard using a modified retrospective transition method. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provide transition practical expedients allowing companies to adopt the new standard with a cumulative effect adjustment as of the beginning of the year of adoption with prior year comparative financial information and disclosures remaining as previously reported. The Company adopted this standard effective January 1, 2019 and elected the package of practical expedients, accounting for leases with contractual terms less than 12 months as short-term leases and the transition relief option to apply legacy GAAP to periods prior to the standard’s effective date. Upon initial adoption of the standard, the Company recorded a $29.5 million right-of-use asset ("ROU") and a $32.1 million operating lease liability to the Consolidated Balance Sheet as of January 1, 2019.
Cloud Computing Implementation Costs
In August 2018, the FASB issued an ASU that provides guidance on the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early2019, with early adoption is permitted. The Company continuesearly adopted this standard effective January 1, 2019 and the effects of this standard were applied prospectively to assess the impact of theeligible costs incurred on or after January 1, 2019. The adoption of this authoritative guidancestandard did not have a material impact on its consolidated financial statements. the Company’s Consolidated Financial Statements.
Cost Basis Equity InvestmentNew Accounting Policies upon Adoption of ASC 842
In 2013,Leases
At the inception of a contract, the Company madedetermines whether the contract is or contains a lease. ROU assets represent the Company's right to use an equity investment in a private companyunderlying asset over the lease term and lease liabilities represent our remaining payment obligation under the lease. ROU assets and liabilities are recognized upon the lease commencement based on the present value of lease payments over the lease term. ROU assets are adjusted for $4.5 million, which represented less than 5%any prepaid or accrued lease payments and unamortized lease incentives or initial direct costs. As most of the outstanding equity of that company. Based on unfavorable growth trends and declining financial performance of this private company,Company's leases do not provide an implicit rate, the Company determined that its investment was fully impaireduses an incremental borrowing rate, the variable interest rate on the revolving line of credit (the “Revolver”), based on information available at the lease commencement in determining the present value of lease payments. The Company's lease terms include options to extend or terminate the lease when it is reasonably certain it will exercise the option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense and recordedsublease income is recognized on a $2.3 millionstraight-line basis over the lease term.
The Company has lease agreements with lease and $2.2 million impairment charge in the third and fourth quarters of 2016, respectively. During the quarter ended September 30, 2017, the Company sold this investmentnon-lease components, which are accounted for $2.1 million in cash and recorded the proceeds as a gain in separately. See “Gain (loss) on cost basis equity investment.Note 6 — Leases” for additional information.
Note 23 — Cash, Cash EquivalentsFair Value of Financial Instruments
The Company follows a three-tier fair value hierarchy, which is described in detail in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. There were no transfers between levels during the three months ended March 31, 2019 and Short-Term Investments2018.
Cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase, including money market funds. purchase. Cash and cash equivalents are classified within Level 1.
Short-term investments consist of readily marketable debt securities with a remaining maturity of more than three months from the time of purchase. The Company classifies allliquidated its investment securities during the first half of its cash equivalents2018 to repay the $150.0 million convertible notes that matured August 1, 2018. Based on the Company’s decision to sell these investment securities, an other-than-temporary impairment occurred and short-term investments as “available for sale,” as these investments are free of trading restrictions and are available for usea $2.0 million impairment loss was recorded in the Company’s daily operations. These marketable securities are carried at fair value, withConsolidated Statement of Operations for the unrealizedthree months ended March 31, 2018. Realized gains and losses net of tax, reported as accumulated other comprehensive income and included as a separate component of stockholders’ equity.were immaterial for the three months ended March 31, 2018. Gains and losses on available-for-sale securities are recognized when realized. When the Company determines that other-than-temporary declinesrecorded in fair value have occurred, the amount of the decline that is related to a credit loss is recognized in earnings. Gains"Interest and losses are determined using the specific identification method. The Company’s realized gains and lossesother expense, net" in the three and nine months ended September 30, 2017 and 2016 were insignificant.Consolidated Statements of Operations.
Cash andThe Company had restricted cash equivalents and short-term investments consisted ofin "Other assets" in the followingConsolidated Balance Sheets as of September 30, 2017March 31, 2019 and December 31, 2016 (in thousands):
September 30, 2017
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Cash | $ | 39,514 |
| | $ | — |
| | $ | — |
| | $ | 39,514 |
|
Cash equivalents: | | | | | | | |
Money market mutual funds | 71 |
| | — |
| | — |
| | 71 |
|
Total cash and cash equivalents | 39,585 |
| | — |
| | — |
| | 39,585 |
|
Short-term investments: | | | | | | | |
Corporate bonds | 55,874 |
| | 60 |
| | (92 | ) | | 55,842 |
|
U.S. agency securities | 34,644 |
| | — |
| | (255 | ) | | 34,389 |
|
Asset-backed securities | 23,937 |
| | 5 |
| | (48 | ) | | 23,894 |
|
U.S. Treasury securities | 26,297 |
| | — |
| | (234 | ) | | 26,063 |
|
Total short-term investments | 140,752 |
| | 65 |
| | (629 | ) | | 140,188 |
|
Cash, cash equivalents and short-term investments | $ | 180,337 |
| | $ | 65 |
| | $ | (629 | ) | | $ | 179,773 |
|
December 31, 2016
|
| | | | | | | | | | | | | | | |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Cash | $ | 47,060 |
| | $ | — |
| | $ | — |
| | $ | 47,060 |
|
Cash equivalents: | | | | | | | |
Money market mutual funds | 632 |
| | — |
| | — |
| | 632 |
|
Total cash and cash equivalents | 47,692 |
| | — |
| | — |
| | 47,692 |
|
Short-term investments: | | | | | | | |
Corporate bonds | 54,827 |
| | 19 |
| | (188 | ) | | 54,658 |
|
U.S. agency securities | 34,658 |
| | — |
| | (281 | ) | | 34,377 |
|
Asset-backed securities | 26,431 |
| | 25 |
| | (23 | ) | | 26,433 |
|
U.S. Treasury securities | 22,701 |
| | — |
| | (288 | ) | | 22,413 |
|
Total short-term investments | 138,617 |
| | 44 |
| | (780 | ) | | 137,881 |
|
Cash, cash equivalents and short-term investments | $ | 186,309 |
| | $ | 44 |
| | $ | (780 | ) | | $ | 185,573 |
|
The following table summarizes the amortized cost2018 of $2.3 million and estimated fair value of money market mutual funds and short-term fixed income securities classified as short-term investments based on stated maturities as of September 30, 2017 (in thousands):
|
| | | | | | | |
| Amortized Cost | | Estimated Fair Value |
Less than 1 year | $ | 12,303 |
| | $ | 12,302 |
|
Due in 1 to 3 years | 128,520 |
| | 127,957 |
|
Total | $ | 140,823 |
| | $ | 140,259 |
|
As of September 30, 2017, the Company did not consider any of its investments to be other-than-temporarily impaired.
Note 3 — Fair Value of Financial Instruments
The Company measures certain financial instruments at fair value on a recurring basis. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 valuations are based on quoted prices in active markets for identical assets or liabilities.
Level 2 valuations are based on inputs that are observable, either directly or indirectly, other than quoted prices included within Level 1. Such inputs used in determining fair value for Level 2 valuations include quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.
All of the Company’s cash equivalents and short-term investments are classified within Level 1 or Level 2.
The following table presents information about the Company’s financial instruments that are measured at fair value as of September 30, 2017 and indicates the fair value hierarchy of the valuation (in thousands):
|
| | | | | | | | | | | |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) |
Cash equivalents: | | | | | |
Money market mutual funds | $ | 71 |
| | $ | 71 |
| | $ | — |
|
Total cash equivalents | 71 |
| | 71 |
| | — |
|
Short-term investments: | | | | | |
Corporate bonds | 55,842 |
| | — |
| | 55,842 |
|
U.S. agency securities | 34,389 |
| | — |
| | 34,389 |
|
Asset-backed securities | 23,894 |
| | — |
| | 23,894 |
|
U.S. Treasury securities | 26,063 |
| | — |
| | 26,063 |
|
Total short-term investments | 140,188 |
| | — |
| | 140,188 |
|
Cash equivalents and short-term investments | $ | 140,259 |
| | $ | 71 |
| | $ | 140,188 |
|
The Company has restricted cash of $1.2 million, within Other assets, net as of September 30, 2017 and December 31, 2016. The restrictedrespectively. Restricted cash is classified within Level 1.
The following table presents information about the Company’s financial instruments that are measured at fair value as of December 31, 2016 and indicates the fair value hierarchy of the valuation (in thousands):
|
| | | | | | | | | | | |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) |
Cash equivalents: | | | | | |
Money market mutual funds | $ | 632 |
| | $ | 632 |
| | $ | — |
|
Total cash equivalents | 632 |
| | 632 |
| | — |
|
Short-term investments: | | | | | |
Corporate bonds | 54,658 |
| | — |
| | 54,658 |
|
U.S. agency securities | 34,377 |
| | — |
| | 34,377 |
|
Asset-backed securities | 26,433 |
| | — |
| | 26,433 |
|
U.S. Treasury securities | 22,413 |
| | — |
| | 22,413 |
|
Total short-term investments | 137,881 |
| | — |
| | 137,881 |
|
Cash equivalents and short-term investments | $ | 138,513 |
| | $ | 632 |
| | $ | 137,881 |
|
The convertible notes issued by the Company in August 2013 are shown on the accompanying consolidated balance sheets at their original issuance value, net of unamortized discount and issuance costs, and are not marked to market each period. The approximate fair value of the convertible notes as of September 30, 2017 and December 31, 2016 was $146.1 million and $143.8 million, respectively. The fair value of the convertible notes was determined using quoted market prices for similar securities, which, due to limited trading activity, are considered Level 2 in the fair value hierarchy.
The Company did not have any other financial instruments or long-term debt measured at fair value as of September 30, 2017 and December 31, 2016.
Note 4 — Debt
Senior Convertible NotesOther Current and Long-Term Liabilities
In August 2013, the Company issued senior convertible notes due 2018 (the “Notes”) in exchange for gross proceeds of $150.0 million. The Notes will mature on August 1, 2018 and are recorded inOther current liabilities as Convertible notes, net.
The Notes are governed by an indenture, dated August 13, 2013 (the “Indenture”), between the Company and Wells Fargo Bank, National Association, as trustee. The Notes bear interest at a rate of 1.50% per year payable semi-annually in arrears on February 1 and August 1, beginning February 1, 2014.
The Notes are convertible at an initial conversion rate of 61.6770 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $16.21 per share of common stock, subject to anti-dilution adjustments upon certain specified events as defined in the Indenture. Upon conversion, the Notes will be settled in cash, shareswere comprised of the
Company’s common stock, or any combination thereof, at the Company’s option.following:Prior to February 1, 2018, the Notes are convertible only upon the following circumstances: |
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| | | |
| (in thousands) |
Legal reserve | $ | 3,750 |
| | $ | 3,750 |
|
Finance lease obligations | 918 |
| | 954 |
|
Contract liability | 826 |
| | 873 |
|
Other liabilities | 375 |
| | 198 |
|
Employee stock purchase plan withholdings | 124 |
| | 384 |
|
Deferred rent | — |
| | 735 |
|
Total | $ | 5,993 |
| | $ | 6,894 |
|
during any calendar quarter commencing after December 31, 2013 (and only during such calendar quarter), if for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading dayOther long-term liabilities were comprised of the immediately preceding calendar quarter, the last reported sale price of common stock on such trading day is greater than or equal to 130% of the applicable conversion price on such trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of common stock and the applicable conversion rate on each such trading day; or
upon the occurrence of specified corporate events described in the Indenture.
Holders of the Notes may convert their Notes at any time on or after February 1, 2018, until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances.
The holders of the Notes may require the Company to repurchase all or a portion of their Notes at a cash repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus accrued and unpaid interest, if any, upon a fundamental change as defined in the Indenture. In addition, upon certain events of default as defined in the Indenture, the trustee or the holders of at least 25% in principal amount of the outstanding Notes may declare 100% of the principal amount of the Notes, plus accrued and unpaid interest, if any, on all the Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of and accrued and unpaid interest on the Notes will automatically become due and payable. The Notes were not subject to conversion or repurchase at September 30, 2017.
To account for the Notes at issuance, the Company separated the Notes into debt and equity components pursuant to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The fair value of debt component was estimated using an interest rate for nonconvertible debt, with terms similar to the Notes, excluding the conversion feature. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to interest expense over the term of the Notes using the interest method. The amount recorded to additional paid-in capital is not to be remeasured as long as it continues to meet the conditions of equity classification. Upon issuance of the $150.0 million of Notes, the Company recorded $111.5 million to debt and $38.5 million to additional paid-in capital.
The Company incurred transaction costs of approximately $4.9 million related to the issuance of the Notes. In accounting for these costs, the Company allocated the costs to the debt and equity components in proportion to the allocation of proceeds from the issuance of the Notes to such components. Transaction costs allocated to the debt component of $3.6 million are
recorded within following:Convertible notes, net, and amortized to interest expense over the term of the Notes. The transaction costs allocated to the equity component of $1.3 million were recorded to additional paid-in capital.
The net carrying amount of the liability component of the Notes consists of the following (in thousands):
|
| | | | | | | |
| September 30, 2017 |
| | December 31, 2016 |
|
Principal amount | $ | 150,000 |
| | $ | 150,000 |
|
Unamortized debt discount | (7,569 | ) | | (13,928 | ) |
Unamortized debt issuance costs | (705 | ) | | (1,297 | ) |
Net carrying amount | $ | 141,726 |
| | $ | 134,775 |
|
The following table presents the interest expense recognized related to the Notes (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Contractual interest expense at 1.5% per annum | $ | 563 |
| | $ | 563 |
| | $ | 1,688 |
| | $ | 1,688 |
|
Amortization of debt issuance costs | 204 |
| | 189 |
| | 592 |
| | 551 |
|
Accretion of debt discount | 2,190 |
| | 2,028 |
| | 6,359 |
| | 5,913 |
|
Total | $ | 2,957 |
| | $ | 2,780 |
| | $ | 8,639 |
| | $ | 8,152 |
|
The net proceeds from the Notes were approximately $145.1 million after payment of the initial purchasers’ discount and offering expense. The Company used approximately $31.4 million of the net proceeds from the Notes to pay the cost of the Note Hedges described below, which was partially offset by $21.8 million of the proceeds from the Company’s sale of the Warrants also described below.
Note Hedges
Concurrent with the issuance of the Notes, the Company entered into note hedges (“Note Hedges”) with certain bank counterparties, with respect to its common stock. The Company paid $31.4 million for the Note Hedges. The Note Hedges cover approximately 9.25 million shares of the Company’s common stock at a strike price of $16.21 per share. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential dilution to the Company’s common stock upon conversion of the Notes and/or offset the cash payment in excess of the principal amount of the Notes the Company is required to make in the event that the market value per share of the Company’s common stock at the time of exercise is greater than the conversion price of the Notes.
Warrants
Separately, the Company entered into warrant transactions, whereby it sold warrants to the same bank counterparties as the Note Hedges to acquire approximately 9.25 million shares of the Company’s common stock at an initial strike price of $21.02 per share (“Warrants”), subject to anti-dilution adjustments. The Company received proceeds of approximately $21.8 million from the sale of the Warrants. If the fair value per share of the Company’s common stock exceeds the strike price of the Warrants, the Warrants will have a dilutive effect on earnings per share, unless the Company elects, subject to certain conditions, to settle the Warrants in cash.
The amounts paid and received for the Note Hedges and the Warrants have been recorded in additional paid-in capital. The fair value of the Note Hedges and the Warrants are not remeasured through earnings each reporting period. |
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| | | |
| (in thousands) |
Asset retirement obligations | $ | 1,381 |
| | $ | 1,368 |
|
Finance lease obligations | 1,256 |
| | 1,510 |
|
Accrued restructuring costs | 654 |
| | 716 |
|
Deferred tax liability | 110 |
| | 268 |
|
Other accrued costs | 111 |
| | 105 |
|
Deferred rent | — |
| | 2,573 |
|
Total | $ | 3,512 |
| | $ | 6,540 |
|
Note 5 — Debt
Revolving Line of Credit
In July 2018, the Company entered into a $40.0 million senior secured Revolver that allows us to borrow against our domestic receivables as defined in the credit agreement. The Revolver matures July 2021 and bears interest at a variable rate per annum based on the greater of the prime rate, the Federal Funds rate plus 0.50% or the one-month LIBOR rate plus 1.00%, plus, in each case, a margin of 1.00% for base rate borrowings or 2.00% for Eurodollar borrowings. As of March 31, 2019, the Company did not have any borrowings outstanding on the Revolver and therefore has no future obligations.
The obligations under the credit agreement are secured by substantially all assets of the borrowers and certain of their subsidiaries, including pledges of equity in certain of the Company’s subsidiaries. The Revolver has covenants with which the Company was in compliance as of March 31, 2019 and December 31, 2018.
Deferred Debt Issuance Costs
Discounts and premiums to the principal amounts are included in the carrying value of debt and amortized to "Interest and other expense, net" over the remaining life of the underlying debt. Unamortized debt issuance costs were $0.2 million as of March 31, 2019 and December 31, 2018. The amortization of all premiums and discounts related to the convertible notes that matured August 2018 was $2.2 million as of March 31, 2018.
Interest expense during the three months ended March 31, 2019 and 2018 was approximately $0.1 million and $3.0 million, respectively, related to the amortization of debt issuance costs, interest expense associated with the Company's debt obligations and accretion of the Company's debt discount.
Note 6 — Leases
The Company has operating leases for office space and finance leases for certain equipment under non-cancelable agreements with various expiration dates through April 2030. Certain office leases include the option to extend the term between three to seven years and certain office leases include the option to terminate the lease upon written notice within one to eight years after lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
In January 2018, the Company entered into a sublease with a third-party for the San Francisco office space through the remaining term of the lease of November 30, 2022. The Company recognizes rent expense and sublease income on a straight-line basis over the lease period and accrues for rent expense and sublease income incurred but not paid. Rent expense and sublease income during the three months ended March 31, 2018 was approximately $2.6 million and $0.2 million, respectively.
Supplemental income statement information related to leases was as follows: |
| | | |
| For the Three Months Ended March 31, 2019 |
| (in thousands) |
Operating lease cost | $ | 2,881 |
|
| |
Finance lease cost: | |
Amortization of leased assets | 151 |
|
Interest on lease liabilities | 41 |
|
Total finance lease cost | 192 |
|
| |
Sublease income | (468 | ) |
Net lease cost | $ | 2,605 |
|
Supplemental balance sheet information related to leases was as follows: |
| | | |
| March 31, 2019 |
| (in thousands) |
Operating leases: | |
Right-of-use assets | $ | 36,944 |
|
| |
Operating lease liabilities | $ | 8,504 |
|
Operating lease liabilities, net of current portion | 30,918 |
|
Total operating lease liabilities | $ | 39,422 |
|
| |
Finance leases: | |
Property and equipment | $ | 3,303 |
|
Accumulated depreciation | (1,283 | ) |
Property and equipment, net | $ | 2,020 |
|
| |
Other current liabilities | $ | 918 |
|
Other long-term liabilities | 1,256 |
|
Total finance lease liabilities | $ | 2,174 |
|
Lease term and discount rate information related to leases were as follows:
|
| | |
| For the Three Months Ended March 31, 2019 |
Weighted-average remaining lease term (in years): | |
Operating lease | 5.3 |
|
Finance lease | 2.5 |
|
Weighted-average discount rate: | |
Operating lease | 6.5 | % |
Finance lease | 8.3 | % |
Maturities of lease liabilities were as follows as of March 31, 2019: |
| | | | | | | | | | | |
| Operating Leases(1) | | Operating Sublease | | Finance Leases |
| | | | | |
| (in thousands) |
Remainder of 2019 | $ | 7,630 |
| | $ | (1,413 | ) | | $ | 810 |
|
2020 | 10,531 |
| | (1,932 | ) | | 976 |
|
2021 | 10,377 |
| | (1,989 | ) | | 569 |
|
2022 | 7,130 |
| | (1,878 | ) | | 36 |
|
2023 | 2,217 |
| | — |
| | — |
|
Thereafter | 8,769 |
| | — |
| | — |
|
Total lease payments | 46,654 |
| | (7,212 | ) | | 2,391 |
|
Less: interest | (7,232 | ) | | — |
| | (217 | ) |
Total | $ | 39,422 |
| | $ | (7,212 | ) | | $ | 2,174 |
|
(1) During February 2019, the Company entered into a two year lease agreement in Japan that had not yet commenced as of March 31, 2019 with future undiscounted lease payments totaling approximately $0.8 million.
Note 7 — Commitments and Contingencies
Letter of Credit
In connection with two of our leased facilities, the Company is required to maintain two letters of credit totaling $2.3 million. The letters of credit are secured by $2.3 million of cash in money market accounts, which are classified as restricted cash in "Other assets" in our Consolidated Balance Sheets.
Litigation
The Company is subject to various legal proceedings and claims arising in the ordinary course of our business, including the cases discussed below. Although the results of litigation and claims cannot be predicted with certainty, the Company is currently not aware of any litigation or threats of litigation in which the final outcome could have a material adverse effect on our business, operating results, financial position or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company records a contingent liability when it is probable that a loss has been incurred and the amount is reasonably estimable in accordance with accounting for contingencies. As of September 30, 2017,March 31, 2019 and December 31, 2018, the Company has accrued a $1.5$3.8 million reserve relating to our potential liability for currently pending disputes, reflected in Accrued Expenses"Other current liabilities" in the accompanying condensed consolidated balance sheets.
Consolidated Balance Sheets.
On August 23, 2016, the United States District Court for the Middle District of Tennessee granted conditional class certification in a lawsuit originally filed on September 21, 2015 by three former senior sales representatives. The lawsuit, Sarah Patton, et al v. ServiceSource Delaware, Inc., asserts a claim under the Fair Labor Standards Act alleging that certain sales account representatives and senior sales representativesnon-exempt employees in our Nashville location were not paid for all hours worked and were not properly paid for overtime hours worked. The complaint also asserts claims under Tennessee state law for breach of contract and unjust enrichment; however,and, on September 28, 2018, the plaintiffs have not yet filed a motion to certify the state law breach of contract and unjust enrichment claims as a class action. A settlement of all claims was reached at mediation, and the motion for required court approval of the settlement was filed on January 24, 2019. The Company will continue to vigorously defend itself against these claims.anticipates Court approval of the settlement and conclusion of the lawsuit in the coming months.
Non-cancelable Service Contract Commitments
Future minimum payments under non-cancelable service contract commitments were as follows: |
| | | |
| March 31, 2019 |
| (in thousands) |
Remainder of 2019 | $ | 6,370 |
|
2020 | 9,018 |
|
2021 | 7,986 |
|
2022 | 8,277 |
|
2023 | 7,391 |
|
Thereafter | — |
|
Total | $ | 39,042 |
|
Note 68 — Share Repurchase ProgramRevenues, Contract Asset and Stock-Based Compensation
In August 2015, the Board authorized a stock repurchase program (the “Program”) with a maximum authorization to repurchase up to $30.0 million worth of common stock of the Company. This Program expired on August 17, 2017. No shares were repurchased under the Program during the quarter ended September 30, 2017.Liability Balances and Contract Acquisition Costs
The following tables present the disaggregation of revenue from contracts with our clients:
Revenue by Performance Obligation |
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| | | |
| (in thousands) |
Professional services | $ | 383 |
| | $ | 2,007 |
|
Selling services | 55,128 |
| | 56,578 |
|
Total revenue | $ | 55,511 |
| | $ | 58,585 |
|
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| | | |
| (in thousands) |
APJ | $ | 8,674 |
| | $ | 7,594 |
|
EMEA | 13,636 |
| | 15,522 |
|
NALA | 33,201 |
| | 35,469 |
|
Total revenue | $ | 55,511 |
| | $ | 58,585 |
|
Revenue by Contract Pricing |
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| | | |
| (in thousands) |
Fixed consideration | $ | 19,729 |
| | $ | 17,742 |
|
Variable consideration | 35,782 |
| | 40,843 |
|
Total revenue | $ | 55,511 |
| | $ | 58,585 |
|
Contract Balances
Once the Company obtains a client contract, the timing of satisfying performance obligations and the receipt of client consideration can be different and will give rise to contract assets and contract liabilities. As of March 31, 2019 and December 31, 2018, the contract asset balance totaled $0.1 million and $0.2 million, respectively, and the contract liability balance totaled $0.8 million and $0.9 million, respectively. Contract assets and contract liabilities are reflected in "Prepaid expenses and other", "Other assets" and "Other current liabilities" in the Consolidated Balance Sheets.
Transaction Price Allocated to Remaining Performance Obligations
The Company maintains contracts with fixed consideration that are generally with long-standing client relationships and typically renew annually. Assuming none of the Company’s current contracts with fixed consideration are renewed, we estimate receiving approximately $53.5 million in future selling services fixed consideration as of March 31, 2019. Professional services revenues from fixed consideration are based on proportional performance which is typically concluded within 90 days of contract execution. The Company typically bills professional services upfront upon obtaining a client contract. As of March 31, 2019, we estimate $0.3 million in professional services fixed consideration revenue to be recognized through the remainder of 2019.
Contract Acquisition Costs
Certain commissions paid to the Company's sales team upon obtaining a client contract are incremental and recoverable, and capitalized as contract acquisition costs. Under the transition guidance, the Company recorded a $3.3 million contract acquisition asset and corresponding offset to the opening accumulated deficit balance related to previously expensed sales commissions. The Company expensed $1.5 million of the $3.3 million of contract acquisition asset during 2018 and will expense the remainder of the asset over the next five years as follows: $0.6 million remaining in 2019, $0.6 million in 2020 and $0.3 million in 2021 and beyond. The Company recorded $0.3 million in amortization for the three months ended March 31, 2019 related to amounts capitalized upon the adoption of ASC 606.
As of March 31, 2019 and December 31, 2018, the Company capitalized an additional $0.1 million and $1.1 million, respectively, of sales commissions as contract acquisition costs related to contracts obtained during the period. The Company recorded $0.1 millionof amortization expense for the three months ended March 31, 2019 related to amounts capitalized. As of March 31, 2019, the weighted-average remaining amortization period related to these capitalized costs is approximately 1.8 years.
Impairment recognized on contract costs was insignificant for the three months ended March 31, 2019 and 2018.
Applying the practical expedient for amortization periods one year or less, the Company recognizes any incremental costs of obtaining contracts as expense when the cost is incurred. These costs are included in "Sales and marketing" in the Consolidated Statements of Operations.
Note 9 — Stockholders' Equity
Stock-Based Compensation Expense
The following table summarizes the consolidatedpresents stock-based compensation expense included inas allocated within the condensed consolidated statementsCompany's Consolidated Statements of operations (in thousands):
| | | | For the Three Months Ended March 31, |
| | | | | | | | | | 2019 | | 2018 |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | |
| 2017 | | 2016 | | 2017 | | 2016 | (in thousands) |
Cost of revenue | $ | 385 |
| | $ | 299 |
| | $ | 969 |
| | $ | 1,146 |
| $ | 159 |
| | $ | 279 |
|
Sales and marketing | 982 |
| | 565 |
| | 2,834 |
| | 2,152 |
| 443 |
| | 886 |
|
Research and development | 42 |
| | 106 |
| | 107 |
| | 448 |
| (6 | ) | | 64 |
|
General and administrative | 2,074 |
| | 1,276 |
| | 6,486 |
| | 3,695 |
| 974 |
| | 1,882 |
|
Restructuring and other | 352 |
| | — |
| | 352 |
| | — |
| |
Total stock-based compensation | $ | 3,835 |
| | $ | 2,246 |
| | $ | 10,748 |
| | $ | 7,441 |
| $ | 1,570 |
| | $ | 3,111 |
|
The above table does not include $0.1 million of capitalized stock-based compensation related to internal-use software duringfor the three months ended September 30, 2017 and 2016, respectively, and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively.March 31, 2018.
Equity Incentive Plan
Option and restrictedStock Awards Issued to Employees
The following table summarizes information related to stock activity under the 2011 Equity Incentive Plan for the nine months ended September 30, 2017 was as follows (shares in thousands):
|
| | | | | | | | | | | | |
| | | Options Outstanding | | Restricted Stock Outstanding |
| Shares and Units Available for Grant | | Number of Shares | | Weighted- Average Exercise Price | | Number of Shares |
December 31, 2016 | 10,406 |
| | 7,495 |
| | $ | 4.63 |
| | 4,237 |
|
Additional shares reserved under the 2011 Equity Incentive Plan | 3,527 |
| | — |
| | — |
| | — |
|
Granted | (2,973 | ) | | 145 |
| | 3.65 |
| | 2,828 |
|
PSU Additional Goal Shares Achieved | (242 | ) | | — |
| | — |
| | 242 |
|
Options exercised/Restricted stock released | — |
| | (14 | ) | | 4.86 |
| | (1,834 | ) |
RSU shares withheld for taxes | 193 |
| | — |
| | — |
| | — |
|
Canceled/Forfeited | 1,499 |
| | (922 | ) | | 5.47 |
| | (577 | ) |
September 30, 2017 | 12,410 |
| | 6,704 |
| | $ | 4.49 |
| | 4,896 |
|
|
| | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life (Years) | | Intrinsic Value |
| (in thousands) | | | | | | (in thousands) |
Outstanding as of December 31, 2018 | 7,516 |
| | $ | 3.34 |
| | | | $ | — |
|
Granted | 25 |
| | $ | 1.01 |
| | | | |
Expired and/or forfeited | (3,334 | ) | | $ | 4.08 |
| | | | |
Outstanding as of March 31, 2019 | 4,207 |
| | $ | 2.74 |
| | 7.89 | | $ | — |
|
Exercisable as of March 31, 2019 | 1,422 |
| | $ | 5.26 |
| | 4.66 | | $ | — |
|
The weighted average grant-dateweighted-average fair value of employee stock options granted during the three months ended September 30, 2017March 31, 2019 and 20162018 was $1.74$0.53 and $2.30 per share, respectively, and $1.90 and $2.03 per share for the nine months ended September 30, 2017 and 2016,$1.81, respectively. The unamortized grant date fair valueAs of bothMarch 31, 2019 there was $1.8 million of unrecognized compensation expense related to stock options andgranted under the 2011 Equity Incentive Plan (the "2011 Plan"), which is expected to be recognized over a weighted-average period of 2.8 years.
The following table summarizes information related to restricted stock awards totaled $18.0units and performance-based restricted stock units: |
| | | | | | |
| Units | | Weighted-Average Grant Date Fair Value |
| (in thousands) | | |
Non-vested as of December 31, 2018 | 5,669 |
| | $ | 3.29 |
|
Granted | 75 |
| | $ | 1.01 |
|
Vested | (228 | ) | | $ | 3.82 |
|
Forfeited | (508 | ) | | $ | 3.82 |
|
Non-vested as of March 31, 2019 | 5,008 |
| | $ | 3.18 |
|
As of March 31, 2019 there was $11.2 million at September 30, 2017.of unrecognized compensation expense related to non-vested restricted stock units and performance-based restricted stock units granted under the 2011 Plan, which is expected to be recognized over a weighted-average period of 2.5 years.
Potential shares of common stock that are not included in the determination of diluted net loss per share because they are anti-dilutive for the periods presented consist of weighted stock options, non-vestedunvested restricted stock and shares to be purchased under our 2011 Employee Stock Purchase Plan having an anti-dilutive effect of 7.0Plan. The Company excluded from diluted earnings per share the weighted-average common share equivalents related to 10.4 million and 4.66.8 million shares for the
three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively, and 5.8 million and 10.4 million shares for the nine months ended September 30, 2017 and 2016, respectively.because their effect would have been anti-dilutive.
Note 710 — Income Taxes
The Company is subject to taxation in the United StatesU.S. and various state and foreign jurisdictions. Earnings from non-U.S. activities are subject to local country income tax. The Company computes its quarterly income tax provision by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The primary difference between the effective tax rate and the federal statutory tax rate relates to the valuation allowances on the Company’s net operating losses and foreign tax rate differences. IncomeThe "Provision for income tax expenseexpense" in the Consolidated Statements of Operations primarily consistsconsist of income and withholding taxes for foreign and state jurisdictions where the Company has profitable operations, as well as valuation allowance adjustments for certain U.S. tax jurisdictions. No tax benefit was provided for losses incurred in United Statesthe U.S., Ireland and Singapore because those losses are offset by a full valuation allowance. The tax years 20102011 through 20172019 generally remain subject to examination by federal, state and foreign tax authorities.
The gross amount of the Company’s unrecognized tax benefits was $1.0 million and $0.9 million as of September 30, 2017March 31, 2019 and December 31, 2016,2018 respectively, none of which, if recognized, would affect the Company’s effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the three months ended March 31, 2019 and 2018, interest and penalties recognized were insignificant.
Note 811 — Restructuring and Other Related Costs
In early May 2017, theThe Company announced ahas undergone restructuring effortefforts to better align its cost structure with current business and market conditions, including a headcount reduction and the reduction of office space in four locations. Theconditions. These restructuring plan is accounted for in accordance with ASC 420, Exit or Disposal Cost Obligations. The Company recognized restructuringefforts included severance and other charges of $0.5 millionemployee costs, lease and $6.3 million during the threeother contract termination costs and nine months ended September 30, 2017, respectively.asset impairments. Severance and other employee costs include stockseverance payments, related employee benefits, stock-based compensation related to the accelerated vesting of certain equity awards severance payments, related employee benefits and employee-related legal fees. Lease and other contract termination costs include charges related to lease consolidation and abandonment of spaces no longer utilized and the cancellation of certain contracts with outside vendors. Asset impairments include charges related to leasehold improvements and furniture in spaces vacated or no longer in use. The restructuring plans are accounted for in accordance with ASC 420, Exit or Disposal Cost Obligations and future cash outlays are recorded in "Accrued expenses", "Accrued compensation and benefits" and "Other long-term liabilities" in our Consolidated Balance Sheetsas of March 31, 2019 and December 31, 2018.
In February 2019, the Company announced a restructuring effort to better align its cost structure with current business and market conditions, resulting in a headcount reduction. The Company recognized charges related to this restructuring effort of $1.1 million for the three months ended March 31, 2019 and expects to haveincur additional costs through September 2019.
The following table presents restructuring and other related expenses throughcosts related to the remainder ofFebruary 2019 restructuring effort: |
| | | |
| Severance and Other Employee Costs |
| (in thousands) |
Balance as of January 1, 2019 | $ | — |
|
Restructuring and other related costs | 1,058 |
|
Cash paid | (693 | ) |
Balance as of March 31, 2019 | $ | 365 |
|
In May 2017, asthe Company announced a restructuring activities targeted at reducing the overalleffort to better align its cost structure with current business and market conditions, including a headcount reduction and the reduction of the business will continue over several quarters. Also, future cash outlaysoffice space in four locations. The Company recognized charges related to thesethis restructuring activities are expectedeffort of $0.1 million for the three months ended March 31, 2018. The Company does not expect to total $1.3 million. These amounts are reflected in Accounts payable, Accrued compensation and benefits and Accrued expensesincur additional restructuring charges related to the May 2017 restructuring as of September 30, 2017.March 31, 2019.
RestructuringThe following table presents restructuring and other liability activities forrelated costs related to the period ended September 30,May 2017 is summarized as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Severance and Other Employee Costs | | Lease and Other Contract Termination Costs | | Asset Impairments | | Total |
Restructuring and other liability at January 1, 2017 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Restructuring and other charges | 3,399 |
| | 1,974 |
| | 886 |
| | 6,259 |
|
Cash paid | (2,908 | ) | | (830 | ) | | — |
| | (3,738 | ) |
Non-cash impairment charges | — |
| | — |
| | (886 | ) | | (886 | ) |
Acceleration of stock-based compensation expense in additional paid-in capital | (352 | ) | | — |
| | — |
| | (352 | ) |
Restructuring and other liability at September 30, 2017 | $ | 139 |
| | $ | 1,144 |
| | $ | — |
| | $ | 1,283 |
|
|
| | | | | | | | | | | | | | | |
| Severance and Other Employee Costs | | Lease and Other Contract Termination Costs | | Asset Impairments | | Total |
| | | | | | | |
| (in thousands) |
Balance as of January 1, 2017 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Restructuring and other related costs | 3,483 |
| | 2,939 |
| | 886 |
| | 7,308 |
|
Cash paid | (3,060 | ) | | (1,185 | ) | | — |
| | (4,245 | ) |
Change in estimates and non-cash charges | — |
| | — |
| | (886 | ) | | (886 | ) |
Acceleration of stock-based compensation expense in additional paid-in capital | (352 | ) | | — |
| | — |
| | (352 | ) |
Balance as of December 31, 2017 | 71 |
| | 1,754 |
| | — |
| | 1,825 |
|
Restructuring and other related costs | 120 |
| | 89 |
| | — |
| | 209 |
|
Cash paid | (188 | ) | | (1,133 | ) | | — |
| | (1,321 | ) |
Change in estimates and non-cash charges | (3 | ) | | 252 |
| | — |
| | 249 |
|
Balance as of December 31, 2018 | — |
| | 962 |
| | — |
| | 962 |
|
Cash paid | — |
| | (45 | ) | | — |
| | (45 | ) |
Change in estimates and non-cash charges | — |
| | (17 | ) | | — |
| | (17 | ) |
Balance as of March 31, 2019 | $ | — |
| | $ | 900 |
| | $ | — |
| | $ | 900 |
|
Note 12 — Subsequent Events
GAAP requires an entity to disclose events that occur after the balance sheet date but before financial statements are issued or are available to be issued (“subsequent events”) as well as the date through which an entity has evaluated subsequent events. There are two types of subsequent events. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (“recognized subsequent events”). The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (“nonrecognized subsequent events”). No significant recognized or nonrecognized subsequent events were noted.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our unaudited consolidated financial statementsConsolidated Financial Statements and notes thereto which appear elsewhere in this Quarterly Reportquarterly report on Form 10-Q.
This report, including this MD&A, includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.1934, as amended.Forward looking statements may appear throughout this report. These forward-looking statements are generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,”result” and variations of such words or similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those identified elsewhere in this report and those discussed in the sections of our Annual Report on Form 10-K entitled “Special Note Regarding Forward“Forward Looking Statements and Industry Data”Statements” and “Risk Factors” and in our other filings with the Securities and Exchange Commission (“SEC”). Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
All dollar amounts expressed as numbers in this MD&A are in millions unless otherwise noted.
OVERVIEWOverview
ServiceSource International, Inc. is a global leader in outsourced, performance-based customer success and revenue growth solutions. Through our people, processes and technology, we find, convert, grow and retain revenue on behalf of our clients—clients — some of the world’s leading business-to-business companies—companies — in more than 3545 languages. Our solutions help our clients strengthen their customer relationships, drive improved customer adoption, expansion and retention and minimize churn. Our technology platform and best-practice business processes combined with our highly-trained, client-focused revenue delivery professionals and data from over 1520 years of operating experience enable us to provide our clients greater value for our customer success services than attained by our clients’clients' in-house customer success teams.
“ServiceSource,” “the Company,” “we,” “us,” or “our”, as used herein, refer to ServiceSource International, Inc. and its wholly-owned subsidiaries, unless the context indicates otherwise.
BasisKey Financial Results – First Quarter 2019
GAAP revenue was $55.5 million, compared with $58.6 million reported for Q1 2018.
GAAP net loss was $5.7 million or $0.06 per diluted share, unfavorable compared with GAAP net loss of Presentation$11.7 million or $0.13 per diluted share reported for Q1 2018.
Adjusted EBITDA was $1.0 million, compared with $1.6 million reported for Q1 2018.
Ended the quarter with $27.1 million of cash and cash equivalents and restricted cash and no borrowings under the Company’s $40.0 million revolving line of credit.
Results of Operations
For the Three Months Ended March 31, 2019 Compared to the Same Period Ended March 31, 2018
Net Revenue, Cost of Revenue and Gross Profit
Substantially all of our netNet revenue is primarily attributable to commissions we earn from the sale of renewals of maintenance, support and subscription agreements on behalf of our clients. We generally invoicealso generate revenues from selling professional services. Historically, we earned a small percentage of our clients for our services in arrears on a monthly basis for sales commissions, and on a quarterly basis for certain performance sales commissions; accordingly, we typically have no deferred revenue related to these services. We do not set the price, terms or scope of services in the service contracts with end customers and do not have any obligations related to the underlying service contracts between our clients and their end customers.
We also earntotal revenue from the sale of subscriptions to our cloud-based applications. To date, subscription revenue has been a small percentage of total revenue. We expect revenues generated from subscriptions of Renew OnDemand to continue declining for the remainder of 2017. Subscription fees are accounted for separately from commissions, and they are billed in advance over a monthly, quarterly or annual basis. Subscription revenue is recognized ratably over the related subscription term.
We have generated a significant portion of our revenue from a limited number of clients. Our top ten customers accounted for 67% and 65% of our net revenue for the nine months ended September 30, 2017 and 2016, respectively.
The loss of revenue from any of our top clients for any reason, including the failure to renew our contracts, termination of some or all of our services, a change of relationship with any of our key clients or their acquisition, can cause a significant decrease in our revenue.
Our business is geographically diversified. Through the first three quarters of 2017, 64% of our net revenue was earned in North America and Latin America (“NALA”), 24% in Europe, Middle East and Africa (“EMEA”) and 12% in Asia Pacific Japan (“APJ”). Net revenue for a particular geography generally reflects commissions earned from sales of service contracts managed from our revenue delivery centers in that geography. Predominantly all of the service contracts sold and managed by our revenue delivery centers relate to end customers located in the same geography. In addition, our Kuala Lumpur, Manila and Sofia locations are revenue delivery centers where we have centralized, for our worldwide operations, the key contract renewal processes that do not require regional expertise, such as client data management and quoting.
Cost of Revenue and Gross Profit
Our cost of revenue expenses includeincludes employee compensation, technology costs, including those related to the delivery of our cloud-based technologies and allocated overhead costs. Compensation
|
| | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | | | |
| 2019 | | 2018 | | | | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
Net revenue | $ | 55,511 |
| | 100 | % | | $ | 58,585 |
| | 100 | % | | $ | (3,074 | ) | | (5 | )% |
Cost of revenue | 39,476 |
| | 71 | % | | 41,724 |
| | 71 | % | | (2,248 | ) | | (5 | )% |
Gross profit | $ | 16,035 |
| | 29 | % | | $ | 16,861 |
| | 29 | % | | $ | (826 | ) | | (5 | )% |
Net revenue decreased by $3.1 million or 5%, for the three months ended March 31, 2019 compared to the same period in 2018 primarily due to client churn.
Cost of revenue decreased $2.2 million, or 5%, for the three months ended March 31, 2019 compared to the same period in 2018, primarily due to the following:
$1.8 million decrease in depreciation and amortization expense includes salary,primarily due to internally developed software fully amortized as of July 2018; and
$1.0 million decrease in employee related costs primarily due to lower bonus benefits and stock-based compensation for our dedicated service sales teams. Our allocated overhead includes costs for facilities,commissions driven by lower revenue attainment and lower travel and entertainment expenditures.
$0.7 million increase in information technology and depreciation, including amortization of internal-use software associated with our service revenue technology platform and cloud applications. Allocated costs for facilities consist of rent, maintenance and compensation of personnel in our facilities departments. Our allocated costs for information technology include costs associated with third-party data centers where we maintain our data servers, compensation of our information technology personnel and the cost of support and maintenance contracts associated with computer hardware and software. To the extent our client base or business with our existing client base expands, we may need to hire additional service sales personnel and invest in infrastructure to support such growth. Our cost of revenue may fluctuate significantly and increase or decrease on an absolute basis and as a percentage of revenue in the near term, including for the reasons discussed under, “Factors Affecting Our Performance—Implementation Cycle” in our 2016 Annual Report on Form 10-K.costs.
Operating Expenses
|
| | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | | | |
| 2019 | | 2018 | | | | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
Operating expenses: | | | | | | | | | | | |
Sales and marketing | $ | 7,949 |
| | 14 | % | | $ | 9,238 |
| | 16 | % | | $ | (1,289 | ) | | (14 | )% |
Research and development | 1,263 |
| | 2 | % | | 1,516 |
| | 3 | % | | (253 | ) | | (17 | )% |
General and administrative | 10,982 |
| | 20 | % | | 12,889 |
| | 22 | % | | (1,907 | ) | | (15 | )% |
Restructuring and other related costs | 1,058 |
| | 2 | % | | 53 |
| | — | % | | 1,005 |
| | * |
|
Total operating expenses | $ | 21,252 |
| | 38 | % | | $ | 23,696 |
| | 40 | % | | $ | (2,444 | ) | | (10 | )% |
* Not considered meaningful.
Sales and Marketing. Marketing
Sales and marketing expenses are a significant component of our operating costs andprimarily consist primarily of compensation expenses and sales commissions for our sales and marketing staff, amortization of contract acquisition costs, allocated expenses and marketing programs and events. We sell
Sales and marketing expense decreased $1.3 million, or 14%, for the three months ended March 31, 2019 compared to the same period in 2018, primarily due to the following:
$1.4 million decrease in employee related costs associated with employee attrition and our solutions throughrestructuring effort to better align our global sales organization, which is organized across three geographic regions: NALA, EMEAcost structure with current business and APJ. Our commission plans provide that payment of commissions to our sales representatives is contingent on their continued employment, and we recognize expense overmarket conditions as well as a period that is generally between the contract signing date and twelve to fourteen months following the execution of the applicable contract. When commissions are paid upon contract signing and are not contingent on future payments and continued employment, we consider that portion of the commission to be earned and therefore expensed at contract signing.decrease in travel costs; partially offset by
$0.1 million increase in information technology costs.
Research and Development. Development
Research and development expenses primarily consist primarily of employee compensation expense, allocated costs and the cost of third-party service providers. We focus our research
Research and development efforts on developing new products and applications related to our technology platform. We capitalize certain expenditures relatedexpense decreased $0.3 million, or 17%, for the three months ended March 31, 2019 compared to the developmentsame period in 2018, primarily due to a decrease in employee related costs driven by our restructuring effort to better align our cost structure with current business and enhancement of internal-use software related to our technology platform.market conditions.
General and Administrative. Administrative
General and administrative expenses primarily consist primarily of employee compensation expense for our executive, human resources, finance and legal functions and related expenses for professional fees for accounting, tax and legal services, as well as allocated expenses, which consistsconsist of depreciation, amortization of internally developed software, facilitiesfacility and technology costs.
General and administrative expense decreased $1.9 million, or 15%, for the three months ended March 31, 2019 compared to the same period in 2018, primarily due to the following:
$1.6 million decrease in employee related costs primarily due to changes in executive management and decreases in recruitment services and temporary labor; and
$0.9 million decrease in professional fees, partially offset by
$0.4 million increase in information technology spend; and
$0.3 million increase in depreciation and amortization expense.
Restructuring and Other.Other Related Costs
Restructuring and other expensesrelated costs primarily consist of severance and other employee costs.
Restructuring and other related costs increased $1.0 million for the three months ended March 31, 2019 compared to the same period in 2018 primarily of employees’ severance payments, related employee benefits, stock compensationdue to costs incurred during the three months ended March 31, 2019 related to the accelerated vesting of certain equity awards, related legal fees, asset impairment chargesFebruary 2019 restructuring effort to better align our cost structure with current business and charges related to leasesmarket conditions, resulting in a headcount reduction in our sales and marketing and research and development teams.
Other Expenses
Interest and other contract termination costs.
Interest Expense and Other, Net and Gain (Loss) on Cost Basis Equity Investment
Interest expense. Interest expense, net primarily consists of amortization of debt issuance costs, interest expense associated with our convertiblethe Company's debt imputed interest from capital lease payments,obligations, accretion of the Company's debt discount, and amortization of debt issuance costs. We recognize accretion of debt discount and amortization of interest costs using the effective interest method. We expect our interest expense to increase slightly for the remainder of 2017 from accretion of debt discount, amortization of deferred financing costs and contractual interest costs as a result of our August 2013 issuance of $150.0 million aggregate principal amount of convertible notes due August 2018.
Other, net. Other, net consists primarily of foreign exchange gains and losses and the interest income earned on our cash and cash equivalents and marketable securities, investments. We expect otherimputed interest from our finance lease payments and foreign exchange gains and losses. |
| | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | | | |
| 2019 | | 2018 | | | | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
Interest expense | $ | (92 | ) | | — | % | | $ | (3,022 | ) | | (5 | )% | | $ | 2,930 |
| | (97 | )% |
Other (expense) income, net | $ | (398 | ) | | (1 | )% | | $ | 176 |
| | — | % | | $ | (574 | ) | | * |
|
Impairment loss on investment securities | $ | — |
| | — | % | | $ | (1,958 | ) | | (3 | )% | | $ | 1,958 |
| | (100 | )% |
* Not considered meaningful.
Interest expense decreased $2.9 million, or 97%, for the three months ended March 31, 2019 compared to the same period in 2018, primarily due to the maturity and payoff of our $150.0 million convertible notes in August 2018.
Other (expense) income, net increased $0.6 million for the three months ended March 31, 2019 compared to vary dependingthe same period in 2018, primarily due to a decrease in interest income earned on the movement inour short-term investments and foreign currency exchange rates andfluctuations.
During 2018, we determined to liquidate the related impactmajority of our investment securities to have sufficient cash on hand to repay our $150.0 million convertible notes due August 1, 2018. Based on our foreign exchange gain (loss) anddecision to sell these investment securities, we determined an other-than-temporary impairment occurred as of March 31, 2018. Consequently, a $2.0 million impairment loss was recorded in our Consolidated Statement of Operations for the return of interest on our investments.three months ended March 31, 2018.
Gain (loss) on cost basis equity investment.Provision for Income Tax Expense In 2013, |
| | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | | | |
| 2019 | | 2018 | | | | |
| Amount | | % of Net Revenue | | Amount | | % of Net Revenue | | $ Change | | % Change |
| (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
Provision for income tax expense | $ | (12 | ) | | — | % | | $ | (13 | ) | | — | % | | $ | 1 |
| | (8 | )% |
The tax expense resulted primarily from profitable jurisdictions where no valuation allowance has been provided. Provision for income tax expense decreased 8% for the three months ended March 31, 2019 compared to the same period in 2018, due to a decrease in profitable operations in certain foreign jurisdictions.
Liquidity and Capital Resources
Our primary operating cash requirements include the payment of compensation and related costs and costs for our facilities and information technology infrastructure. Historically, we made an equity investment in a private company for $4.5have financed our operations from cash provided by our operating activities and cash proceeds from the exercise of stock options and our employee stock purchase plan. We believe our existing cash and cash equivalents and available funds from our senior secured revolving line of credit (the “Revolver”) will be sufficient to meet our working capital and capital expenditure needs over the next twelve months.
As of March 31, 2019, we had cash and cash equivalents of $24.8 million, which represented less than 5%primarily consisted of the outstanding equity of that company. Based on unfavorable growth trendsdemand deposits and declining financial performance of this private company, we determined this investment was fully impaired and recorded a $2.3 million and $2.2 million impairment charge in the third and fourth quarters of 2016, respectively. During the quarter ended September 30, 2017, we sold this investment for $2.1 millionmoney market mutual funds. Included in cash and recordedcash equivalents was $5.5 million held by our foreign subsidiaries used to satisfy their operating requirements. We consider the proceedsundistributed earnings of ServiceSource Europe Ltd. and ServiceSource International Singapore Pte. Ltd. permanently reinvested in foreign operations and have not provided for U.S. income taxes on such earnings. As of March 31, 2019, we had no unremitted earnings from our foreign subsidiaries.
During July 2018, we entered into a $40.0 million Revolver that allows us to borrow against our domestic receivables as defined in the credit agreement. The Revolver matures July 2021 and bears interest at a variable rate per annum based on the greater of the prime rate, the Federal Funds rate plus 0.50% or the one-month LIBOR rate plus 1.00%, plus, in each case, a margin of 1.00% for base rate borrowings or 2.00% for Eurodollar borrowings. Proceeds from the credit facility are used for working capital and general corporate purposes.
As of March 31, 2019, we did not have any borrowings outstanding under the Revolver. Obligations under the credit agreement are secured by substantially all assets of the borrowers and certain of their subsidiaries, including pledges of equity in certain of our subsidiaries. The Revolver has covenants with which we are in compliance as of March 31, 2019 and December 31, 2018.
Letter of Credit and Restricted Cash
In connection with two of our leased facilities, we are required to maintain two letters of credit totaling $2.3 million. The letters of credit are secured by $2.3 million of cash in money market accounts, which are classified as restricted cash in "Other assets" in our Consolidated Balance Sheets.
Cash Flows
The following table presents a summary of our cash flows: |
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| | | |
| (in thousands) |
Net cash provided by operating activities | $ | 2,084 |
| | $ | 599 |
|
Net cash used in investing activities | (2,898 | ) | | (573 | ) |
Net cash (used in) provided by financing activities | (49 | ) | | 257 |
|
Effect of exchange rate changes on cash and cash equivalents and restricted cash | 185 |
| | 78 |
|
Net change in cash and cash equivalents and restricted cash | $ | (678 | ) | | $ | 361 |
|
Our total depreciation and amortization expense was comprised of the following: |
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| | | |
| (in thousands) |
Purchased intangible asset amortization | $ | — |
| | $ | 85 |
|
Internally developed software amortization | 1,259 |
| | 2,832 |
|
Property and equipment depreciation | 2,026 |
| | 1,886 |
|
Total depreciation and amortization | $ | 3,285 |
| | $ | 4,803 |
|
Operating Activities
Net cash provided by operating activities increased $1.5 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a gain.result of lower cash payments made during the current period compared to the prior period related to both employee compensation and other operating costs previously accrued for; offset by less cash received during the current period compared to the prior period related to lower year over year revenue attainment in the preceding fourth quarters and a decrease in Adjusted EBITDA.
Investing Activities
Income Tax Provision (Benefit)
We account for income taxes using an asset and liability method, which requires the recognition of taxes payable or refundableNet cash used in investing activities increased $2.3 million for the current yearthree months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a result of a decrease in cash inflows from the sale and deferred tax assetsmaturity of our short-term investments during 2018, offset by a decrease in cash outflows related to the acquisition of property and liabilitiesequipment during the three months ended March 31, 2019.
Financing Activities
Net cash used in financing activities increased $0.3 million for the expectedthree months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a result of a reduction in proceeds from the issuance of common stock, offset by an increase in cash outflows from repayment of finance lease obligations during the three months ended March 31, 2019.
Off-Balance Sheet Arrangements
As of March 31, 2019 we did not have any off balance sheet arrangements.
Contractual Obligations and Commitments
Our contractual obligations primarily consist of obligations under operating and finance leases for office space and certain equipment and non-cancelable service contracts.
The following table summarizes future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basispayments of our taxable subsidiaries’ assets and liabilities usingcontractual obligations as of March 31, 2019: |
| | | | | | | | | | | | | | | | | | | |
| Total | | Less than 1 year | | 1- 3 years | | 4- 5 years | | More than 5 years |
| | | | | | | | | |
| (in thousands) |
Finance lease obligations | $ | 2,174 |
| | $ | 918 |
| | $ | 1,256 |
| | $ | — |
| | $ | — |
|
Operating lease obligations | 39,422 |
| | 8,491 |
| | 17,580 |
| | 6,420 |
| | 6,931 |
|
Operating sublease income | (7,212 | ) | | (1,889 | ) | | (3,950 | ) | | (1,373 | ) | | — |
|
Service contracts | 39,042 |
| | 8,625 |
| | 24,874 |
| | 5,543 |
| | — |
|
Restructuring and other related costs | 1,265 |
| | 611 |
| | 491 |
| | 163 |
| | — |
|
Total(1) | $ | 74,691 |
| | $ | 16,756 |
| | $ | 40,251 |
| | $ | 10,753 |
| | $ | 6,931 |
|
(1)Excluded from the enacted tax rates in effect fortable is the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
We evaluate our ability to realize the tax benefits associated with deferred tax assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740, Income Taxes, wherein management analyzes all positive and negative evidence available at the balance sheet date to determine whether all or some portion of our deferred tax assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is more likely than not (a probability level of more than 50 percent) that they will not be realized. In assessing the realization of our deferred tax assets, we consider all available evidence, both positive and negative, and place significant emphasis on guidance contained in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.”
We account for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. We record an income tax liability if any,we recorded for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on our tax returns. ToAs of March 31, 2019, our liability for unrecognized tax benefits was $1.0 million. Reasonably reliable estimate of the extent that the assessmentamounts and periods of such tax positions change, the change in estimate is recordedrelated future payments cannot be made at this time.
The contractual commitment amounts in the period in which the determination is made. The reservestable above are adjusted in light of changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of reserve provisions and changes to reservesassociated with agreements that are considered appropriate.
Resultsenforceable and legally binding, which specify significant terms, included payment terms, related services and the approximate timing of Operations
The following table sets forth our operating results asthe transaction. Obligations under contracts that we may cancel without a percentage of net revenue:
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (as % of net revenue) |
Net revenue | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Cost of revenue | 70 | % | | 65 | % | | 70 | % | | 67 | % |
Gross profit | 30 | % | | 35 | % | | 30 | % | | 33 | % |
Operating expenses: | | | | | | | |
Sales and marketing | 13 | % | | 14 | % | | 14 | % | | 17 | % |
Research and development | 2 | % | | 3 | % | | 3 | % | | 3 | % |
General and administrative | 22 | % | | 23 | % | | 23 | % | | 21 | % |
Restructuring and other | 1 | % | | — | % | | 4 | % | | — | % |
Total operating expenses | 38 | % | | 40 | % | | 44 | % | | 41 | % |
Loss from operations | (8 | )% | | (5 | )% | | (14 | )% | | (8 | )% |
Three and Nine Months Ended September 30, 2017 and 2016.
Net Revenue, Cost of Revenue and Gross Profit
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | Change | | % Change | | 2017 | | 2016 | | Change | | % Change |
| (in thousands) | | | | (in thousands) | | |
Net Revenue | $ | 58,132 |
| | $ | 62,514 |
| | $ | (4,382 | ) | | (7 | )% | | $ | 173,103 |
| | $ | 184,233 |
| | $ | (11,130 | ) | | (6 | )% |
Cost of Revenue | 40,803 |
| | 40,789 |
| | 14 |
| | — | % | | 121,729 |
| | 122,568 |
| | (839 | ) | | (1 | )% |
Gross Profit | $ | 17,329 |
| | $ | 21,725 |
| | $ | (4,396 | ) | | (20 | )% | | $ | 51,374 |
| | $ | 61,665 |
| | $ | (10,291 | ) | | (17 | )% |
| | | | | | | | | | | | | | | |
Net revenue decreased $4.4 million, or 7%, for the third quarter of 2017 compared to the third quarter of 2016. The overall decrease was due to contractions and lower production with certain existing customers that wassignificant penalty are not offset by production related to expansions and new businessincluded in the third quarter of 2017.
Our cost of revenue in the third quarter of 2017 was consistent with the third quarter of 2016 as a result of a $0.9 million decrease in employee related costs as a result of shifting headcount to lower cost offices and locations, all related to our continuous efforts to better align employee costs with revenue, a decrease of $0.5 million in temporary labor and consulting costs, $0.2 million decrease in recruitment costs, $0.4 million decrease in information technology, offset by a $1.2 million increase in depreciation and amortization costs and $0.8 million of overhead allocations.
Gross profit in the third quarter of 2017 decreased by $4.4 million, or 20%, compared to the same period in 2016 which is consistent with the decrease in revenue.
Net revenue decreased $11.1 million, or 6%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The overall decrease was due to contractions and lower production with certain existing customers that was not offset by production related to expansions and new business.
The $0.8 million, or 1%, decrease in our cost of revenue in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 reflects a $2.6 million decrease in employee related costs as a result of shifting headcount to lower cost offices and locations, all related to our continuous efforts to better align employee costs with revenue, a decrease of $1.5 million in temporary labor and consulting costs, $0.6 million decrease in recruitment costs, $0.9 million decrease in information technology costs, offset by a $2.6 million increase in depreciation and amortization costs and $2.1 million of overhead allocations.
Gross profit in the nine months ended September 30, 2017 decreased by $10.3 million, or 17%, compared to the same period in 2016, which is in line with the decrease in revenue.above table.
Operating Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | Change | | % Change | | 2017 | | 2016 | | Change | | % Change |
| (in thousands) | | | | (in thousands) | | |
Operating expenses: | | | | | | | | | | | | | | | |
Sales and marketing | $ | 7,829 |
| | $ | 8,847 |
| | $ | (1,018 | ) | | (12 | )% | | $ | 24,790 |
| | $ | 30,626 |
| | $ | (5,836 | ) | | (19 | )% |
Research and development | 1,048 |
| | 1,952 |
| | (904 | ) | | (46 | )% | | 4,534 |
| | 6,132 |
| | (1,598 | ) | | (26 | )% |
General and administrative | 12,543 |
| | 14,638 |
| | (2,095 | ) | | (14 | )% | | 40,029 |
| | 38,233 |
| | 1,796 |
| | 5 | % |
Restructuring and other | 545 |
| | — |
| | 545 |
| | 100 | % | | 6,259 |
| | — |
| | 6,259 |
| | 100 | % |
Total operating expenses | $ | 21,965 |
| | $ | 25,437 |
| | $ | (3,472 | ) | | (14 | )% | | $ | 75,612 |
| | $ | 74,991 |
| | $ | 621 |
| | 1 | % |
Includes stock-based compensation of: | | | | | | | | | | | | | | | |
Sales and marketing | $ | 982 |
| | $ | 565 |
| | $ | 417 |
| | | | $ | 2,834 |
| | $ | 2,152 |
| | $ | 682 |
| | |
Research and development | 42 |
| | 106 |
| | (64 | ) | | | | 107 |
| | 448 |
| | (341 | ) | | |
General and administrative | 2,074 |
| | 1,276 |
| | 798 |
| | | | 6,486 |
| | 3,695 |
| | 2,791 |
| | |
Restructuring and other | 352 |
| | — |
| | 352 |
| | | | 352 |
| | — |
| | 352 |
| | |
Total stock-based compensation | $ | 3,450 |
| | $ | 1,947 |
| | $ | 1,503 |
| | | | $ | 9,779 |
| | $ | 6,295 |
| | $ | 3,484 |
| | |
Sales and marketing expenses
The $1.0 million, or 12%, decrease in sales and marketing expenses in the third quarter of 2017 compared to the third quarter of 2016 resulted from a $0.7 million decrease in employee related costs, a $0.4 million decrease in travel costs and $0.1 million in overhead allocations, offset by a $0.2 million increase in marketing programs.
The $5.8 million, or 19%, decrease in sales and marketing expenses in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 resulted from a $4.5 million decrease in employee related costs, a $1.3 million decrease in travel costs, a $0.1 million decrease in temporary labor and consulting costs, a $0.1 million decrease in recruitment expense and $0.3 million of overhead allocation. These decreases were offset by a $0.6 million increase in marketing programs costs.
Research and development expenses
The $0.9 million, or 46%, decrease in research and development expense in the third quarter of 2017 compared to the third quarter of 2016 was primarily due to a $0.6 million decrease in employee related costs associated with decrease in headcount and a $0.2 million decrease in temporary labor and $0.1 million decrease in overhead allocations.
Internal-use software development capitalization decreased $0.4 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to decreased development efforts related to our Renew OnDemand platform.
The $1.6 million, or 26%, decrease in research and development expense in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily due to $1.5 million decrease in employee related costs associated with a decrease in headcount, a $0.1 million decrease in travel costs and a $0.1 million decrease in rent and facility expense. These decreases were offset by a $0.1 million increase in information technology costs.
Internal-use software development capitalization increased by $0.1 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to continued development efforts related to our internal managed services platforms.
General and administrative expenses
The $2.1 million, or 14%, decrease in general and administrative expense in the third quarter of 2017 compared to the third quarter of 2016 reflected a $1.0 million decrease in employee related costs, a $0.5 million decrease in temporary labor and consulting costs, a $0.2 decrease in rent and facility costs, a $0.3 decrease in travel costs, a $0.7 million decrease in overhead allocations and a $1.5 million decrease due to a non-recurring legal reserve recorded in the third quarter of 2016. Offsetting these decreases was a $0.4 million increase in marketing programs, a $0.3 million increase in recruitment costs, $0.3 million increase in information technology costs and a $1.1 million increase in depreciation and amortization costs.
The $1.8 million, or 5%, increase in general and administrative expense in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 reflected a $1.3 million increase in employee related costs, $0.9 million increase in recruitment costs, a $0.8 increase in information technology, a $2.9 million increase in depreciation expense and a $0.4 million increase in marketing costs. Offsetting these increases was a $0.8 million decrease in travel costs, $0.4 million decrease in temporary labor and consulting fees, $1.5 million decrease related to a non-recurring legal reserve recorded in the third quarter of 2016 and a $1.9 million decrease in overhead allocations.
Restructuring and other expenses
The $0.5 million and $6.3 million increase in restructuring and other in the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016 was related to our recognition of restructuring and other charges during the second and third quarter of 2017. During the second quarter we announced an effort to better align our cost structure with current revenue levels.
Interest Expense and Other, Net and (Gain) Loss on Cost Basis Equity Investment
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | Change | | % Change | | 2017 | | 2016 | | Change | | % Change |
| (in thousands) | | | | (in thousands) | | |
Interest expense | $ | 2,965 |
| | $ | 2,792 |
| | $ | 173 |
| | 6 | % | | $ | 8,672 |
| | $ | 8,191 |
| | $ | 481 |
| | 6 | % |
Other, net | (126 | ) | | (501 | ) | | (375 | ) | | (75 | )% | | (1,117 | ) | | (2,692 | ) | | (1,575 | ) | | (59 | )% |
(Gain) loss on cost basis equity investment | (2,100 | ) | | 2,300 |
| | (4,400 | ) | | 191 | % | | (2,100 | ) | | 2,300 |
| | (4,400 | ) | | 191 | % |
Interest expense increased by $0.2 million, or 6%, in the third quarter of 2017 compared to the third quarter of 2016 and was due to the increased accretion of debt discount under the effective interest method related to the convertible notes issued in August 2013.
Other, net decreased by $0.4 million, or 75%, in the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to foreign currency fluctuations.
Interest expense increased by $0.5 million, or 6%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 and was due to the increased accretion of debt discount under the effective interest method related to the convertible notes issued in August 2013.
Other, net decreased by $1.6 million, or 59%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to foreign currency fluctuations.
(Gain) loss on cost basis equity investment of $2.1 million in the three and nine months ended September 30, 2017 is related to the sale of our equity investment in a private company which was originally purchased for $4.5 million we made in 2013. Based on unfavorable growth trends and declining financial performance of this private company, we determined this investment was fully impaired and recorded a $2.3 million and $2.2 million impairment charge in the third and fourth quarters of 2016, respectively.
Income Tax (Benefit) Provision |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | Change | | % Change | | 2017 | | 2016 | | Change | | % Change |
| (in thousands) | | | | (in thousands) | | |
Income tax (benefit) provision | $ | (180 | ) | | $ | 968 |
| | $ | (1,148 | ) | | * | | $ | 227 |
| | $ | 2,505 |
| | $ | (2,278 | ) | | * |
*Not considered meaningful.
For the third quarter of 2017, we recorded an income tax benefit of approximately $0.2 million. The tax benefit resulted primarily from a taxable loss in a foreign affiliate. Income tax expense decreased in the third quarter of 2017 by $1.1 million compared to the third quarter of 2016 primarily due to state valuation allowance recorded in 2016.
For the nine months ended September 30, 2017, we recorded income tax expense of approximately $0.2 million. This amount primarily represents anticipated taxes in jurisdictions where we have profitable operations, including certain U.S. states and foreign jurisdictions. Income tax expense decreased in the third quarter of 2017 by $2.3 million compared to the third quarter of 2016 primarily due to certain state deferred tax assets.
As of September 30, 2017, we have recorded a full valuation allowance on our state deferred tax assets. No benefit was provided for losses incurred in U.S. and Singapore because those losses are offset by a full valuation allowance.
Liquidity and Capital Resources
At September 30, 2017, we had cash, cash equivalents and short-term investments of $179.8 million, which primarily consisted of demand deposits, money market mutual funds, corporate bonds and United States government obligations held by well-capitalized financial institutions. In addition, at September 30, 2017, we had cash and cash equivalents of $6.5 million held outside of the U.S. by our foreign subsidiaries that was generated by such subsidiaries and which is used to satisfy their current operating requirements. We consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested in foreign operations and we do not have current plans to repatriate these earnings to fund our U.S. operations as we have sufficient cash, cash equivalents and short-term investments held in the United States.
Our primary operating cash requirements include the payment of compensation and related costs, working capital requirements related to accounts receivable and accounts payable, as well as costs for our facilities and information technology infrastructure. Historically, we have financed our operations principally from cash provided by our operating activities, proceeds from stock offerings and the exercise of stock options. We believe our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months.
In August 2013, we issued $150 million aggregate principal amount of 1.50% convertible notes due August 1, 2018 (the “Notes”) and concurrently entered into convertible notes hedges and separate warrant transactions. The Notes will mature on August 1, 2018, unless converted earlier. Upon conversion, the Notes will be settled in cash, shares of our stock, or any combination thereof, at our option. We received proceeds of $145.1 million from the issuance of the convertible notes, net of associated fees, received $21.8 million from the issuance of the warrants and paid $31.4 million for the note hedges. The Notes were not subject to conversion or repurchase at September 30, 2017 and are classified as a current liability on our condensed consolidated balance sheet. We believe we will have sufficient cash and liquid short-term investments to repay the Note at maturity.
Letter of Credit and Restricted Cash
In connection with one of our leased facilities, the Company is required to maintain a $1.2 million letter of credit. The letter of credit is secured by $1.2 million of a money market account which is classified as Other assets, net in our condensed consolidated balance sheet as of September 30, 2017.
Summary Cash Flows
The following table sets forth a summary of our cash flows (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Net cash provided by operating activities | $ | 6,516 |
| | $ | 9,706 |
|
Net cash used in investing activities | (13,707 | ) | | (23,887 | ) |
Net cash provided by (used in) financing activities | 275 |
| | (4,777 | ) |
Net decrease in cash and cash equivalents, net of impact of exchange rate changes on cash | (8,107 | ) | | (20,639 | ) |
Operating Activities
Net cash provided by operating activities was $6.5 million during the nine months ended September 30, 2017. Net loss during the period was $29.9 million adjusted by non-cash charges of $17.2 million for depreciation and amortization, $7.0 million of amortization of debt discount and issuance costs, $0.2 million for deferred income taxes, $10.4 million for stock-based compensation, $2.5 million for restructuring and other costs and a $2.1 million gain on the sale of our cost basis equity investment. Cash provided by operations as a result of the changes in our working capital include a $12.3 million decrease in accounts receivable, net. Uses of cash were related to a $2.4 million decrease in deferred revenue, a $0.8 million decrease in accounts payable, a $0.8 million decrease in accrued expenses, $1.0 million decrease in accrued taxes, $4.7 million decrease in accrued compensation and benefits and a $1.4 million decrease in other liabilities.
Net cash provided by operating activities was $9.7 million during the nine months ended September 30, 2016. Net loss during the period was $23.6 million adjusted by non-cash charges of $11.6 million for depreciation and amortization, $6.5 million of amortization of debt discount and issuance costs, $1.7 million for deferred income taxes, $7.4 million for stock-based compensation and a $2.3 million loss on our cost basis equity investment. Cash provided by operations as a result of the changes in our working capital include a $2.8 million decrease in accounts receivable, net, a $0.4 million increase in accounts payable and a $1.7 million increase in accrued expenses. Uses of cash were related to a $0.8 million decrease in deferred revenue and a $1.5 million decrease in accrued compensation and benefits
Investing Activities
During the nine months ended September 30, 2017, cash used in investing activities was principally related to the proceeds from the sale of cost basis equity investment of $2.1 million, net purchase, sale and maturities of short-term investments of $2.0 million and property and equipment additions of $13.8 million. Property and equipment additions include $9.8 million of capitalized internal-use software development cost.
During the nine months ended September 30, 2016, cash used in investing activities was principally related to the net purchase, sale and maturities of short-term investments of $2.7 million and property and equipment additions of $21.2 million. Property and equipment additions include $9.7 million of capitalized internal-use software development cost.
Financing Activities
Cash provided by financing activities of $0.3 million in the nine months ended September 30, 2017 primarily resulted from the exercise of common stock options and the purchase of common stock under our employee stock purchase plan of $1.1 million offset by the minimum tax withholding requirement of $0.7 million.
Cash used in financing activities of $4.8 million in the nine months ended September 30, 2016 primarily resulted from the $8.9 million repurchase of common stock offset by the exercise of common stock options and the purchase of common stock under our employee stock purchase plan of $5.0 million.
Off-Balance Sheet Arrangements
We do not have any relationships with other entities or financial partnerships such as entities often referred to as structured finance or special-purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
There have been no material changes in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal 2016.
Critical Accounting Policies and Estimates
Management has determined that our most criticalThe preparation of financial statements in conformity with accounting principles generally accepted in the U.S. ("GAAP") requires management to use judgment in the application of accounting policies, are those related to revenue recognition, stock-based compensation, goodwillincluding making estimates and intangible assets and income taxes. There have been no material changes in our criticalassumptions. The Company's significant accounting policies and estimates during the nine months ended September 30, 2017 as compared to the critical accounting policies and estimates disclosedare described in “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations–Operations - Critical Accounting Policies and Estimates” ofEstimates" in our Annual Report on Form 10-K for the year ended December 31, 2016 as filed2018. These policies were followed in preparing the Consolidated Financial Statements for the three months ended March 31, 2019 and are consistent with the SEC on March 6, 2017.year ended December 31, 2018, except for the new accounting policies related to the adoption and application of Accounting Standards Codification Topic 842, Lease Accounting (“ASC 842") as of January 1, 2019.
Recent Accounting Pronouncements
The information contained inFor a discussion of recent accounting pronouncements, see Note 12 - "Summary of Significant Accounting Policies" to our condensed consolidated financial statements in Item 1 under the heading, “Recent Accounting Pronouncements,” is incorporated by reference into this Item 2.Consolidated Financial Statements.
Non-GAAP Financial Measurements
ServiceSource believes net income (loss), as defined by GAAP, is the most appropriate financial measure of our operating performance; however, ServiceSource considers adjusted EBITDA to be a useful supplemental, non-GAAP financial measure of our operating performance. We believe adjusted EBITDA can assist investors in understanding and assessing our operating performance on a consistent basis, as it removes the impact of the Company's capital structure and other non-cash or non-recurring items from operating results and provides an additional tool to compare ServiceSource's financial results with other companies in the industry, many of which present similar non-GAAP financial measures.
EBITDA consists of net income (loss) plus provision for income tax (benefit) expense, interest and other expense, net and depreciation and amortization. Adjusted EBITDA consists of EBITDA plus non-cash stock-based compensation, amortization of contract acquisition costs related to the initial adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), restructuring and other related costs and impairment loss on investment securities.
This non-GAAP measure should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP.
The following table presents the calculation of adjusted EBITDA reconciled from “Net loss”: |
| | | | | | | |
| For the Three Months Ended March 31, |
| 2019 | | 2018 |
| | | |
| (in thousands) |
Net loss | $ | (5,719 | ) | | $ | (11,652 | ) |
Provision for income tax expense | 12 |
| | 13 |
|
Interest and other expense, net | 490 |
| | 2,846 |
|
Depreciation and amortization | 3,285 |
| | 4,803 |
|
EBITDA | (1,932 | ) | | (3,990 | ) |
Stock-based compensation | 1,570 |
| | 3,111 |
|
Amortization of contract acquisition asset costs - ASC 606 initial adoption | 257 |
| | 426 |
|
Restructuring and other related costs | 1,058 |
| | 53 |
|
Impairment loss on investment securities | — |
| | 1,958 |
|
Adjusted EBITDA | $ | 953 |
| | $ | 1,558 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We believe that thereThere have been no significant changes in our market risk exposures associated with foreign currency risk, inflation risk and interest rate risk for the ninethree months ended September 30, 2017,March 31, 2019, as compared with those discussed in our Annual Reportannual report on Form 10-K for the fiscal year ended December 31, 2016.2018.
The effective interest rate on our Revolver was 6.50% as of March 31, 2019. As of March 31, 2019, we did not have any borrowings outstanding on the Revolver, therefore a 1% increase in the effective interest rate would not increase interest expense. We may incur additional expense in future periods if we borrow on the Revolver.
Item 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”).
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
(b)Changes in Internal Control Over Financial Reporting
There has not been any change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings in which we are involved, see Note 57 - Commitments and Contingencies" to our condensed consolidated financial statements appearing elsewherethe Consolidated Financial Statements in this Quarterly Report on Form 10-Q.Item 1.
Item 1A. Risk Factors
A summary of factors which could affect results and cause results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf, are further described under the captionsee “Risk Factors” in Part I,1, Item 1A of our 2016 Annual Reportannual report on Form 10-K.10-K for the year ended December 31, 2018. There have been no material changes in the nature of these factors since December 31, 2016.2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
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| | |
Exhibit Number | | Description of Document |
| | |
10.1 | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1* | | |
| | |
32.2* | | |
| | |
101 | | Interactive data files (XBRL) pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2019 and December 31, 2016,2018, (ii) the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, (iii) the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, (iv) Consolidated Statements of Stockholders’ Equity for the Condensedthree months ended March 31, 2019 and 2018, (v) the Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 and (v)(vi) the Notes to Condensed Consolidated Financial Statements. |
* Filed or Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | SERVICESOURCE INTERNATIONAL, INC. (Registrant) |
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Date: | NovemberMay 8, 20172019 | By: | /s/ ROBERT N. PINKERTONRICHARD G. WALKER |
| | | Robert N. PinkertonRichard G. Walker
Chief Financial Officer (Principal Financial and Accounting Officer) |